Manufacturers with floating-rate ABL revolvers built 2026 hedging plans around Fed rate cuts. Those cuts keep slipping.
The Fed's own dot plot points to one more quarter-point cut this year. Futures pricing puts that at roughly even odds for September or October.
That is a narrower path than borrowers priced in earlier this year. Every month a cut slips, the mismatch grows.
SOFR-linked revolvers reset monthly or quarterly. A hedge locked against a steeper cut path now sits against a flatter one.
An existing cap or swap starts pricing a different world. It's not the one it was bought for.
The Cut Path Narrowed Since Spring
Three-month SOFR is pinned near 4.3% today. That is keeping borrowing costs elevated for leveraged floating-rate borrowers.
That's per ABF Journal's middle market debt coverage. It's true even before spreads are added.
Core PCE inflation running near 2.8% is the main obstacle to further easing. That is per PrimeRates' 2026 Fed forecast.
The Fed needs that number closer to its 2% target before cutting again. Markets are not confident it gets there this year.
Middle-Market Spreads Are Not Falling Either
Lower middle-market unitranche deals are pricing at 500 to 700 basis points over SOFR. Lenders anticipate another 25 to 50 basis points of widening in coming quarters.
That is separate from the base rate question entirely. A borrower can get Fed cuts and still see cost rise.
That's the trap. Banks are tightening C&I lending standards broadly in the meantime, per ABF Journal.
Demand stays flat. That combination pushes more borrowers toward asset-based and non-bank structures.
Those structures price against a floating base rate almost without exception. The hedging question follows the borrower into the new facility.
A Swap Locks a Rate. A Cap Buys Insurance.
The two instruments work differently. That difference matters more when the cut path is uncertain.
A swap exchanges a borrower's floating payments for a fixed rate entirely. It carries no upfront cost.
It also obligates both directions. Unwinding a swap early, once rates move in the borrower's favor, triggers a breakage cost.
That's per SouthState Correspondent's lending desk. A cap works differently.
The borrower pays an upfront premium for the right to be paid back. That triggers once the floating rate clears an agreed strike.
There is no further obligation once that premium is paid. If rates fall further than expected, the borrower simply keeps the benefit.
Collars Split the Difference, at a Cost
A collar combines both instruments to reduce the upfront cost of a standalone cap. The borrower buys a cap and sells a floor at the same time.
Selling that floor funds part or all of the cap premium. Some collars price at zero upfront cost this way.
The tradeoff is real. If rates fall below the floor, the borrower pays the difference back.
That happens instead of capturing the full benefit of lower rates.
That structure fit a market pricing steady cuts. It fits less cleanly now that the cut path itself is in question.
Why the Cut Path Actually Matters to a Hedge
A borrower who bought a swap in early 2026 priced in multiple cuts. That locked in a fixed rate against a curve that has since gone flatter.
The fixed rate now sits above where floating payments would otherwise land. The swap is doing exactly what it was built to do.
It's just costing more than expected. The floating alternative simply didn't fall that far.
A cap buyer faces a different problem. It's tied to renewal timing, not the strike they already own.
That strike assumed a certain path.
A higher-for-longer base rate means the cap pays out more often. Good for the buyer. Renewing it costs more, though.
Today's pricing on that same strike runs well above the original purchase.
Where This Shows Up in an ABL Facility
Most ABL agreements don't mandate a specific hedge instrument. Many do require some form of rate protection past a set floating-rate exposure threshold.
That threshold usually kicks in once total debt crosses a certain size. That covenant language sits alongside the facility's fixed charge coverage ratio tests.
A hedge sized for spring's rate-cut assumptions can leave that ratio thinner now. That happens if cuts don't arrive on schedule.
Higher-than-planned interest expense compresses the numerator of that coverage test directly. It is worth checking now, ahead of a covenant test date, rather than after.
Covenant compliance reviews increasingly flag interest rate assumptions as a line item, not an afterthought.
What Treasurers Are Actually Doing About It
Companies are not abandoning hedges. Businesses with floating-rate debt keep using swaps and caps to manage exposure.
That's the same approach used when the cut path looked steeper. It's per RSM's primer on hedge tax treatment.
What is changing is tenor and structure. Shorter-dated caps let a borrower reprice sooner if the cut path shifts.
The tradeoff: renewing more often. Longer swaps lock in more certainty instead.
They also lock in more risk of paying above-market once cuts finally land. Neither choice is free.
The cost just shows up in a different spot on the balance sheet.
Next Move
This article reflects reporting and analysis as of September 2026. Figures cited are sourced as noted and subject to change.
Reshore Bridge is a lead generation service connecting operators with independent financing partners. It is not a lender, broker, or swap dealer. Not financial or hedging advice.