For any company with meaningful debt, the question of whether to fix interest rates is one of the most consequential treasury decisions on the table. Get it right and you protect margins, stabilise cash flows, and give the board certainty on financing costs. Get it wrong — or simply fail to act — and rising rates can squeeze profitability at precisely the moment the business can least afford it.
Understanding the exposure
If your debt carries a floating rate — typically linked to SONIA in the UK or EURIBOR in Europe — your interest cost moves with the market. A 1% rise in rates on £20 million of floating-rate debt adds £200,000 per year to your interest bill. For many mid-market companies, that is a material impact on earnings.
Converts floating to fixed. Full certainty, but no benefit if rates fall.
Sets a maximum rate. Keeps upside if rates fall. Requires upfront premium.
Sets both a max and min rate. Reduced or zero premium, but limited upside.
The right — but not obligation — to enter a swap at a future date. Ideal for contingent exposures.
Interest rate swaps
A swap converts your floating-rate exposure to a fixed rate for a defined period. You continue to pay floating on your underlying loan, but receive floating and pay fixed under the swap — netting to a fixed rate. Swaps provide certainty but remove the benefit of falling rates.
Interest rate caps
A cap sets a maximum rate you will pay. If rates rise above the cap level, you receive a payment that offsets the additional cost. If rates stay below the cap, you benefit from the lower floating rate. Caps require an upfront premium.
Collars
A collar combines a cap and a floor — you set both a maximum and a minimum rate. The premium income from selling the floor reduces or eliminates the cost of the cap, but you give up the benefit of rates falling below the floor level.
Swaptions
A swaption gives the holder the right — but not the obligation — to enter into an interest rate swap at a pre-agreed rate on a future date. Think of it as an option on a swap.
Swaptions are particularly useful when the need to hedge is contingent on an event that has not yet occurred. For example, if a company is in the process of securing a new floating-rate loan facility, a swaption allows it to lock in a fixed rate now while the facility is being finalised — without committing to a swap that may not be needed if the facility does not proceed.
They are also used when a company anticipates refinancing existing debt but does not yet know the exact timing. A swaption provides protection against rates rising during the interim period, while preserving the flexibility to walk away if circumstances change.
Like caps, swaptions require an upfront premium. The cost depends on the strike rate, the tenor of the underlying swap, and market volatility. They are typically more relevant for larger exposures where the premium is justified by the scale of the risk.
When to act
Timing the interest rate market is as difficult as timing any other market. The value of hedging is not in predicting the direction of rates but in removing uncertainty from your financial plan.
The right time to act is when you have a clear view of your debt profile, your budget assumptions, and the level of rate risk the board is willing to accept.
0–12 months: Fix 75–100% · 12–24 months: Fix 50–75% · 24+ months: Fix 25–50%
This reduces the risk of fixing everything at a single, potentially unfavourable rate.
A framework, not a forecast
The best approach is to establish a framework — similar to FX hedging governance — that defines what proportion of your floating-rate debt should be fixed at different tenors. This removes the pressure of trying to "call" the market and replaces it with a disciplined, repeatable process.
Getting it right
Interest rate hedging is not just a treasury decision — it has direct implications for the P&L, the balance sheet, and the company's covenant compliance. Board-level engagement is essential. The hedging policy should cover interest rate risk alongside FX and commodity risk, with the same governance standards applied.