filings.toolsItem 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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We have exposure to market risks due to the volatility of interest rates, foreign currency exchange rates, credit rating changes and equity and bond markets. A portion of these risks may be hedged, but fluctuations could impact our results of operations, financial position and cash flows.
Interest Rate Risk. Our exposure to market risk for changes in interest rates relates primarily to our cash investment portfolio. As of June 28, 2019, we had no available-for-sale debt securities that had been in a continuous unrealized loss position for a period greater than 12 months. We determined no available-for-sale debt securities were other-than-temporarily impaired as of June 28, 2019.
We have fixed rate debt obligations. We enter into debt obligations for general corporate purposes including capital expenditures and working capital needs.
The table below presents principal amounts and related fixed or weighted-average interest rates by year of maturity for our investment portfolio and debt obligations as of June 28, 2019.
| Fiscal Years Ended | ||||||||||||||||||||||||||||||||
| (Dollars in millions, except percentages) | 2020 | 2021 | 2022 | 2023 | 2024 | Thereafter | Total | Fair Value at June 28, 2019 | ||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||||||||
| Cash equivalents: | ||||||||||||||||||||||||||||||||
| Floating rate | $ | 580 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 580 | $ | 580 | ||||||||||||||||
| Average interest rate | 2.42 | % | 2.42 | % | ||||||||||||||||||||||||||||
| Other debt securities | ||||||||||||||||||||||||||||||||
| Fixed rate | $ | — | $ | 3 | $ | — | $ | — | $ | — | $ | 4 | $ | 7 | $ | 7 | ||||||||||||||||
| Average interest rate | 5.00 | % | 5.00 | % | ||||||||||||||||||||||||||||
| Debt | ||||||||||||||||||||||||||||||||
| Fixed rate | $ | — | $ | — | $ | 750 | $ | 941 | $ | 500 | $ | 2,100 | $ | 4,291 | $ | 4,349 | ||||||||||||||||
| Average interest rate | 4.25 | % | 4.75 | % | 4.88 | % | 5.02 | % | 4.81 | % |
Foreign Currency Exchange Risk. From time to time, we may enter into foreign currency forward exchange contracts to manage exposure related to certain foreign currency commitments and anticipated foreign currency denominated expenditures. Our policy prohibits us from entering into derivative financial instruments for speculative or trading purposes. At this time, we have not identified any material exposure associated with the potential changes related to the British vote to exit the European Union.
We hedge portions of our foreign currency denominated balance sheet positions with foreign currency forward exchange contracts to reduce the risk that our earnings will be adversely affected by changes in currency exchange rates. The change in fair value of these contracts is recognized in earnings in the same period as the gains and losses from the remeasurement of the assets and liabilities. All these foreign currency forward exchange contracts mature within 12 months.
We did not have any material net gains (losses) recognized in Cost of revenue, or Other, net for cash flow hedges due to hedge ineffectiveness or discontinued cash flow hedges during the fiscal years 2019 and 2018.
Seagate Technology public limited company | 2019 Form 10-K | 47
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The table below provides information as of June 28, 2019 about our foreign currency forward exchange contracts. The table is provided in U.S. dollar equivalent amounts and presents the notional amounts (at the contract exchange rates) and the weighted-average contractual foreign currency exchange rates.
| (Dollars in millions, except average contract rate) | Notional Amount | Average Contract Rate | Estimated Fair Value(1) | |||||||||
| Foreign currency forward exchange contracts: | ||||||||||||
| Singapore Dollar | $ | 100 | $ | 1.36 | $ | 1 | ||||||
| Chinese Renminbi | 99 | $ | 6.84 | (1 | ) | |||||||
| British Pound Sterling | 18 | $ | 0.80 | — | ||||||||
| Total | $ | 217 | $ | — | ||||||||
| (1) | Equivalent to the unrealized net gain (loss) on existing contracts. |
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Other Market Risks. We have exposure to counterparty credit downgrades in the form of credit risk related to our foreign currency forward exchange contracts and our fixed income portfolio. We monitor and limit our credit exposure for our foreign currency forward exchange contracts by performing ongoing credit evaluations. We also manage the notional amount of contracts entered into with any one counterparty, and we maintain limits on maximum tenor of contracts based on the credit rating of the financial institution. Additionally, the investment portfolio is diversified and structured to minimize credit risk.
Changes in our corporate issuer credit ratings have minimal impact on our near term financial results, but downgrades may negatively impact our future ability to raise capital, increase the cost of such capital and our ability to execute transactions with various counterparties.
We are subject to equity market risks due to changes in the fair value of the notional investments selected by our employees as part of our Non-qualified Deferred Compensation Plans—the Seagate Deferred Compensation Plans (the “SDCPs”). We entered into a Total Return Swap (“TRS”) in order to manage the equity market risks associated with the SDCPs liabilities. We pay a floating rate, based on the London Inter-Bank Offered Rate (“LIBOR”) plus an interest rate spread, on the notional amount of the TRS. The TRS is designed to substantially offset changes in the SDCPs liabilities due to changes in the value of the investment options made by employees. See “Item 8. Financial Statements and Supplementary Data—Note 8. Derivative Financial Instruments” of this Report on Form 10-K.
Seagate Technology public limited company | 2019 Form 10-K | 48
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