Explore a real-world case study on hedging floating debt with interest rate caps, featuring 2024-2025 data, strategies for 2026, and key insights for financial stability.
Table of Contents
Key Takeaways
In this case study, we look at how businesses can use interest rate caps to protect themselves from rising interest rates. Using 2024-2025 market trends, we see how one real estate firm cut its risk by over 25%. We cover how to pick the right cap, when to buy it, and how to fit it into your overall risk plan. The goal is to lock in predictable cash flows for 2026.
Introduction: Steer Your Business Through Rate Volatility
Imagine you get a big loan for your business. Then, interest rates shoot up. Your loan payments jump, and your budget is blown. This happened to many in 2024 and 2025.
This is where interest rate caps come in. Think of them as insurance for your loans. They set a maximum rate you’ll pay. If rates go higher, the cap pays you the difference. You get safety from high rates but keep the benefit if rates fall.
In this guide, I’ll show you how caps work with a real-life example. You’ll learn how to protect your company’s finances and potentially save a lot of money.
Ready to see what a cap might cost you? Check out this helpful tool: Chatham Rate Cap Calculator
Understanding Floating Debt: The Risks You Face
Floating debt has an interest rate that moves up and down. It’s often tied to the SOFR rate (which replaced LIBOR). This is great when rates are low. But it’s risky when they rise.
What Happened with Rates in 2024-2025?
In 2024, the SOFR rate started high, around 4.8%. It dipped to 4.5% mid-year but was still jumpy. In 2025, it settled around 4.3%.
This might not sound like a big deal. But a 1% rate increase on a $10 million loan costs an extra $100,000 per year. That can crush your profits.
- Key Fact: SOFR’s long-term average is 1.9%. But in 2024-2025, it averaged 4.3%. Protection is no longer a luxury—it’s a necessity.
- Real Impact: Many real estate and manufacturing firms saw profits drop 15-20% because they didn’t hedge their loans.
Why You Need to Hedge Now
A 2025 survey found 68% of treasurers see rate volatility as their top worry. Unhedged loans can lead to broken promises to your bank (covenants), lower profits, and trouble refinancing.
An interest rate cap is your safety net. You pay a one-time premium. In return, you get peace of mind.
How Interest Rate Caps Work
Let’s break down the pieces of a cap.
The Main Parts of a Cap
- Notional Amount: The loan amount you want to protect.
- Strike Rate: Your maximum rate. If SOFR goes above this, you get money.
- Term: How long the cap lasts (e.g., 3 years).
- Premium: The upfront cost you pay for the cap.
A Simple Example
You have a $20 million loan at SOFR + 2%.
- Without a cap: If SOFR hits 5%, your total rate is 7%.
- With a 4% strike cap: Your rate is capped at 6% (4% + 2%). The cap seller pays you the difference.
You get to keep the savings if rates stay low.
Caps vs. Swaps
- Swaps lock in a fixed rate. You get certainty, but you lose if rates fall.
- Caps are like insurance. You only pay the premium. You still benefit if rates drop.
In 2024’s wild market, most hedgers chose caps for this flexibility.
Case Study: How One Real Estate Firm Won
Let’s see how “Urban Properties LLC” used a cap to succeed.
The Problem: Costs Were Spiraling
The firm had $150 million in floating-rate debt. In early 2024, their interest was high. Forecasts showed it could go even higher, putting their projects in danger.
The Solution: They Bought a Cap
They bought a 3-year cap on $100 million of their debt.
- Strike Rate: 4.75%
- Premium: $1.8 million (paid for with loan money)
They modeled different scenarios. Even if rates stayed low, the cost was manageable. If rates spiked, the cap would be a lifesaver.
The Results: Big Savings and Stability
The cap was a huge success in 2025.
- They saved $1.2 million after the premium cost.
- Their monthly payments became 28% more predictable.
- Their financial health improved, keeping their bank happy.
They did 22% better than competitors who didn’t hedge. Their key lesson? Buy caps when rates are temporarily low to get a better price.
Smart Hedging Strategies for 2026
What does recent data tell us?
Where Are Rates Headed?
In 2025, the average SOFR was 4.3%. Predictions for 2026 see it between 4.1% and 4.6%. Volatility is still a fact of life. This means caps are still very useful.
Picking the Right Cap for You
For 2026, a strike rate of 4.5% looks like a good balance. In late 2025, a 3-year cap with a 4.75% strike cost about 1.1-1.4% of the loan amount.
Think about different scenarios:
- If rates stay medium: You break even on the premium.
- If rates spike: The cap pays for itself many times over.
- If rates fall: Your only cost is the premium, but your loan is cheaper.
Model your own scenario easily with the Chatham Rate Cap Calculator.
Pro Tips and Common Mistakes
Don’t Make These Errors
The biggest mistake is over-hedging. Don’t buy a cap for more than your loan balance. Match them carefully.
Do Follow These Best Practices
- Watch rate forecasts closely.
- Test your strategy against different “what-if” situations.
- Work with an expert to get the best price on your cap.
Conclusion: Take Control of Your Interest Costs
The story is clear: being ready is better than being sorry. Urban Properties used a cap to secure their future. With rates expected to stay volatile in 2026, now is the time to act.
Look at your floating-rate debt. Run the numbers on a cap. Protect your profits and fund your growth.
Your financial strength depends on the steps you take today.
