According to the Bank for International Settlements, just half of 14,000 European and US companies with variable-rate debt were hedging their interest-rate risk at the end of last year, despite evidence that firms that hedge experienced a smaller negative impact on their interest coverage ratios and market valuations as rates rose.
This tallies with the findings of Chatham Financial’s January 2024 ‘State of financial risk management’ report, particularly that smaller companies with less robust interest-rate hedging practices have been disproportionately impacted by the rising rate environment.
Chatham Financial also noted that although a smaller percentage of companies are exposed to foreign currencies than interest rates, those that are are more likely to hedge that FX risk – suggesting that treasurers need to become more knowledgeable about the impact of interest rate movements on their businesses.
Sigh of relief
Some financial directors have learnt the hard way about the risk of remaining 100% on floating-rate debt, suggests Abhishek Sachdev, founder of Vedanta Hedging.
“Following a very challenging period last summer, treasurers are now breathing a sigh of relief that they no longer need to pay to enter into swaps,” he says.
