The collapse of Silicon Valley Bank — which failed last month after it was forced to sell longer-term U.S. treasuries that had plummeted in value due to rising rates — sent many analysts, regulators and executives scrambling to assess interest rate risks lurking on balance sheets.

While many companies outside the financial sector don’t typically hold the same longer-duration government bonds on their books as banks, the rising rate environment that has gripped the economy since last year has underscored the need for finance leaders to consider locking in hedges against other rate risks they do have before it’s too late, said Amol Dhargalkar, global head of corporates at Chatham Financial, a Kennett Square, Pa.-based advisory firm. 

“Rates can come down too but I think the lesson here is that the market can move very rapidly,” Dhargalkar said in an interview, adding that it’s important for companies to be proactive because hedging prices will move in anticipation of what the Fed is saying it will do before the central bank actually acts. “The market will move faster than the Fed itself will.” 

The hedging market has been volatile. For example, the rate on three-year interest rate swaps — a common hedging tool companies use — was just 1.2% on Jan. 1, 2022, Dhargalkar said. By the end of June it had gone to just over 3%, he said. And as of Friday the rate touched 4.02%, according to investing.com.

There’s still no clear end in sight yet to the central bank’s rate hikes. Indeed, a report last week showed core inflation rising 5.6% last month, fueling expectations that the Federal Reserve will raise the main interest rate by a quarter percentage point next month, CFO Dive reported. Since March 2022 the Fed has raised the federal funds rate from near zero to a range between 4.75% and 5%.

For non-banks, there are the three main rate risks and corresponding strategies that CFOs across industries and geographies have used to mitigate interest rate risks, Dhalgalkar says. They are: 

1. Rising floating-rate debt costs: Whether your debt is LIBOR or SOFR-based, the cost of floating rate revolvers or notes is rising, he said. Most companies will either get an interest rate cap to limit the expense or enter into interest rate swaps, which act in effect like a rate lock does on a home mortgage, Dhalgalkar said. “If the rate goes up you will actually receive a payment on the interest rate swap but if it goes down you will make a payment,” he said. “The net effect is you are essentially locking in the cost of the financing.” 
2. Fixed-rate refinancing costs: Fixed-rate debt held today, which is set to mature soon, will cost more once it is refinanced. “What we see is the most proactive CFOs and treasurers are really managing their future issuance risk,” he said. “They’re saying ‘let me get ahead of it.’ It’s not about winning or losing on interest rates; it’s about creating certainty for the business,” Dhalgalkar said. A company that needs to issue $1 billion in new debt could break the hedging into pieces so they’re dollar-cost averaging their bets on a month by month basis through forward starting interest rate swaps or treasury locks, he said. 
3. Falling rates: When the rise in rates ultimately stalls out or even reverses course, it will pinch some companies. A subset of firms with floating rate assets and fixed-rate liabilities are starting to prepare for that scenario because that would mean that a company is making less on its assets and thus has lower inflows that it can tap to pay for its fixed-rate debt. While it’s counterintuitive, these companies with fixed-rate liabilities might want to convert the debt to floating rate, he said. “Even today we do see a number of companies swapping fixed-rated debt back to floating because of this mismatch,” Dhalgalkar said.