As global pharmaceutical company Bristol Myers Squibb (BMS) evaluated its financial risk post–Covid-19, two key issues stood out. First was the interest rate environment. The U.S. Federal Reserve was working to bring inflation under control by raising rates, but the markets were already pricing in both the rising rates and an easing cycle expected to follow shortly after rates stopped rising. At the same time, the federal funds futures curve, which BMS treasury uses to forecast future interest income for the corporate P&L, was extremely volatile.
“The asset side of our balance sheet was exposed to rate volatility through current and future interest-income generation, whereas interest rates had very little impact on the liability side because nearly all the company’s debt was fixed-rate,” explains Keith Gaub, assistant treasurer. “The market’s expectations on the future path of interest rates was highly uncertain.”
Most of the company’s cash was in short-term investments, which are very sensitive to interest rate changes. In corporate forecasts, the Other Income and Expense (OI&E) forecast “was having material movement over short periods of time,” Gaub says. “We would call our FP&A [financial planning and analysis] team to notify them ‘We’re taking $60 million of income out.’ Then, a few days later, we would be putting $50 million of income back in. Our strategy is to eliminate noise from the P&L and allow our earnings to reflect the company’s operations, so we started thinking about how we could insulate ourselves from a highly unpredictable short-term rates market.”
Unfortunately, because the yield curve was inverted at the time, entering into swaps to address the asset and liability mismatch would have been very expensive. BMS treasury began modeling interest income in a variety of rate cycles and communicating to senior management some potential impacts of specific market movements. The treasury group asked permission to launch an interest rate swaps program with staggered maturities, which it would begin when pricing at various tenors reached specific targets. Their intention was to build fixed-to-floating swaps that would improve alignment between BMS’s assets and liabilities.
“The majority of our cash is in very short-dated securities, earning a rate similar to SOFR,” Gaub says. “We needed a way to get a longer-term rate without committing our cash for a longer period of time. With an interest rate swap, we can lock in the rate for six months, one year, or two years and still maintain the liquidity on our cash should we need it for strategic purposes.”
Going with a staggered maturity profile with rolling swaps maturing in a matter of months would provide coverage in the immediate term, with the ability to roll them back should market conditions become more favorable. “We want to add interest stability, but not at the cost of current-quarter OI&E,” says Ravi Patel, director of financial risk management. “We had to be measured and balanced in where we would be on the curve and hedge longer when volatility presented opportunities.”
The team performed a technology, tax, and accounting (TTA) assessment to ensure they had all necessary measures in place to efficiently execute the strategy. They aligned with the tax function to make sure the derivatives would receive the appropriate tax treatment, and they worked to align with treasury accounting to ensure accuracy in their hedge accounting. In addition, since BMS had not executed an interest rate swap since the conversion of benchmark rates from LIBOR to SOFR, they tested their treasury management system for accuracy of SOFR feeds and import of the fixed-rate component.
Perhaps most important, the treasury team needed to ensure their mark-to-market settlements would be correct. “As these trades have interest accruals and interest payments, we needed to calculate how much we owe—or how much the bank owes us—in a timely manner,” Patel says. “With SOFR, you have a day or two to calculate the amount, then you need to align with the bank and make or receive that payment. We worked with our technology vendors to make sure that was working properly.”
After completing this due diligence, the team presented their hedging plan to BMS’s treasurer and CFO for final approval. Both Patel and Gaub worked in the financial services industry before moving to corporate treasury, so they have a deep understanding of how derivatives and other instruments work. “The first step in an initiative like this is education,” Gaub says. “We did not unexpectedly walk into our CFO’s office one day and ask to do $5 billion in fixed-to-float swaps. We made sure the CFO was comfortable with the instruments, knew how they behave, and was aware of any risks associated with them.”
Then, when the CFO understood what they wanted to do, and why, “we explained that because of how fast the market moves, it wouldn’t make sense to get the CFO’s direct approval prior to every trade,” Gaub adds. “We requested that management approve the size of the program and the strategy, but then give the treasurer authority to approve individual trades. Our CFO approved, so now, once we see the most appropriate maturities and the tenors we want to take, we can move quickly.”
Over the past couple of years, BMS treasury has executed a short-dated interest rate swap program with a total notional of around $5 billion. They have fixed-to-floating swaps in laddered maturities from six months to two years. “Imagine that we have $5 billion in cash, which we’re investing at 4 percent,” Gaub explains. “We are generating a significant return off that. But if interest rates suddenly dropped from 4 percent to 0 percent, our interest income would disappear. That was our concern when we started this program.
“Now, with the swaps, if interest rates go to 0 percent, our interest income will fall to $0, but the swaps-to-float will generate the same amount that we just lost on interest income,” he continues. “And if, all of a sudden, rates were to rise, we would lose money on the swaps but generate significantly higher interest income. Achieving this correlation gives us greater P&L certainty, regardless of what happens with rates.”
Since launching the interest rate fixed-to-floating swap program, BMS treasury has expanded the longest duration they use. “We’re trying to stay balanced—to gain some certainty for the long term, while also ensuring that if some of the swaps we put on are not at the best market levels, we have chances to roll and restrike them as the market changes,” Gaub says. “We don’t ever want to be the reason the company misses earnings forecasts. We want to remove as much risk as possible so that when earnings are off, it’s not due to interest rates, but because something else is driving the P&L.”
This project reflects the culture of innovation and continuous improvement within BMS treasury. “We constantly challenge ourselves and reassess decisions,” Gaub says. “We look at transactions and trades that we have on the books and ask whether there’s anything we can do to further optimize our current position. When we see an opportunity, we evaluate how BMS might benefit and whether it would introduce the company to more risk. It’s like working on your house: It’s never entirely finished. And the swaps-to-float was no different.”
BMS’s innovative spirit was also a driver of the treasury team’s other key post-Covid win in financial risk management: a restructuring of its Japanese yen (JPY) cash flow hedge program. “As a U.S.–domiciled company with heavy ex-U.S. [excluding U.S.] sales, we are significantly exposed to changes in FX [foreign exchange] rates across various currencies,” Gaub says. “When we’re looking out a three-year budget window, we forecast sales in the currencies they’re transacted in, then translate those amounts back to U.S. dollars. And if the dollar strengthens significantly, that translation will negatively impact our budget.
“For example,” he continues, “if we forecast that we will sell €100 million worth of goods in Europe in 2027 with a euro-dollar exchange rate of 1.15, then we might tell our FP&A team to budget for $115 million in European sales that year. But when we get to 2027 and the €100 million in sales actually happen, what will we do if the dollar has strengthened significantly and we’re actually at 1:1 parity between the euro and the dollar? Then we’re going to generate only $100 million in European sales, which is a true miss for our budget.”
BMS had been using FX forwards and options to hedge its yen-denominated cash flows for years when the dollar began strengthening in 2024. Treasury envisioned stabilizing earnings regardless of USD-JPY volatility by taking an approach similar to the floating-to-fixed interest rate swaps program.
First, they began discussing with their banking partners the opportunity to restructure their JPY hedge portfolio to benefit from the potential strengthening of the yen against the dollar. “We had some yen options that were struck at very low levels and some FX forwards locking in favorable rates,” Patel explains. “Because the dollar was so strong, our earnings abroad were worth less, but the hedges were there to offset that, and the options and forwards had mark-to-market gains of about $20 million. We decided to unwind those trades and keep those gains in our foreign earnings.”
They executed a ¥26 billion restructure of in-the-money yen put options and ¥17 billion of sold forward contracts by unwinding the derivatives and buying JPY put options. “We did offsetting trades for each of them,” Patel says. “We sold FX options with an identical strike and then did an offsetting FX forward for the same amount of yen at the current market rate. By combining these trades, we net out to a known dollar amount that we will receive as those trades mature.
“If the yen weakens, we will still have the protection from the replacement options,” Patel continues. “We did pay something for that optionality,” but because the options reset BMS’s participation rate to a historically weak level, “we pocketed $20 million in cash that those existing trades were worth.”
At the same time, the treasury team considered how best to hedge other tenors where it didn’t previously have coverage. “We put on new FX options based on the current FX forward rates,” Patel says. “In the end, if we locked in 140 USD-JPY and then the yen went below 140, we would keep all the gains. Whereas if the yen weakened to, say, 160, we would be protected.”
The result of both BMS financial risk management initiatives has been to mute some of the noise on the company’s financial statements. Gaub believes the projects were well worth the effort, and that their success is due largely to the treasury team’s thoughtful and careful planning.
“Resource challenges are always going to be present in treasury,” Gaub says. “When you’re interested in an initiative that would be beneficial to the enterprise, you have to make sure it won’t introduce so much complexity that it pulls people off their day jobs or introduces new operational risk. Deploying the right systems and introducing automation are key to making large-scale improvements.”
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