AFP interview: Treasurers prepare for US interest rate hike with synthetic euro debt

With rising interest rates being a hot topic at this year’s AFP conference, many treasurers were discussing how they can structure their portfolios to minimise interest expenses.

“Many multinationals are thinking of taking their US dollar debt capital structure and using cross-currency swaps to turn it into synthetic euro debt,” Amol Dhargalkar, managing director of Chatham Financial, told GTNews.

“This lowers their interest expense pretty significantly. Treasurers can save 2+ points on interest per annum by synthetically doing euro debt.

“The combination of this strategy with the new US hedging accounting standard that has come out is really beneficial for these multinationals in allowing them to lower interest expense,” he added.

Many US multinationals have already done cross-currency swaps to create synthetic euro debt, according to Dhargalkar.

“I would call it the ‘trade du jour’. A lot of banks are pitching it to their clients and it does make sense for a lot of companies,” he said.

The two most popular options are synthetic debt or issuing actual debt. Often synthetic debt is actually cheaper than actual debt, but not all of the time.

Many US treasurers are preparing their debt and capital structure for a higher interest rate environment in 2018, but the concern is that some younger treasurers may have never experienced this before.

“There is a large portion of the profession that just hasn’t seen high rates,” said Dhargalkar.

“Most of the last 15 years has had interest rates of 1% or lower. People have not seen this high-interest rate environment, at least not for a long time.

“The time to hedge is not once rates have risen – then it is too late. A lot of treasurers want to be proactive in their approach to it,” he said.

Trump’s tax reform

Conversely, the promise of corporate tax reform by President Trump has meant that many treasurers are taking a wait-and-see approach in other areas of their treasury operations.

“Most treasurers are quite hopeful that the corporate tax rate will come down. It is not just about lower taxes but also tax reform,” explained Dhargalkar.

There is concern over when the tax reform will happen or whether it will actually happen.

“If it didn’t happen in 2018, there will be a lot of frustration,” said Dhargalkar. “Treasurers are holding back on a lot of things.

“Many of the tax reform proposals involve the repatriation holiday or some type of one-time corporate tax on excess funds held offshore, so why act now and pay the full tax rate instead of waiting?” he said.

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