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Corporates hedge their bets as rates strategies diverge

Treasurers need to reassess their approach to interest-rate hedging as monetary policy on either side of the Atlantic continues to diverge.


Corporate interest-rate hedging activity is driven by the desire to protect against future adverse rate movements and to get certainty on future interest expense. With the European Central Bank (ECB) and Bank of England’s (BoE) reluctance to hike rates rapidly standing in sharp contrast to the strategy of the Fed – which is expected to raise rates seven times this year – rate hedging has become a priority.

“We would expect that mandatory hedge requirements may make it back into facility agreements in the future, requiring the borrower to hedge a minimum amount for a specified tenor,” says Svenja Schumacher, assistant director in Deloitte’s treasury and hedging advisory team.

Hedging is a risk-management tool, whereas trying to predict the market can have a serious impact on financials
Svenja Schumacher, Deloitte

Under normal conditions, the decision to hedge would be assessed in the context of sensitivities such as leverage ratio, interest coverage and cyclicality.

However, the newest generation of finance directors – particularly those who have experienced more than a decade of near-zero rates – may have limited experience in interest-rate hedging and therefore may feel unsure about how to approach this challenge.


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