With agency financing and hedging, Kensington serves as a valuation agent and sub-servicer for cap valuation and escrow adjustment. These services are part of JLL’s expertise in the structuring and placement of interest-rate cap contracts. Our cap professionals advise on thousands of transactions per year, which grows as more agency borrowers use supplemental financing to bolster their capital stacks.

Across asset classes and lending sources, agency and non-agency, borrowers can make strategic hedging decisions around SOFR and Treasury benchmarks using a number of data tools. This allows U.S. private investors to protect floating-rate or fixed-rate debt financings, as well as prepayment risk with respect to yield maintenance and defeasance.

SOFR currently stands at 4.30%, down from a high of 5.56% in September 2024, and is implied to fall further in the second half of 2025 based on the current SOFR forward curve. Private investors can borrow new debt or refinance at a lower cost as SOFR is projected to hover below the 3.50% threshold in the years ahead.

“With the amount of capital sources and structures available to borrowers, there is always the question of: What rate am I fixing at today and what could it look like tomorrow?” said Dustin Dulin, Senior Managing Director, JLL Capital Markets. “Questioning rate movement is a lot more pronounced today given the recent volatility and hedging activity has in turn increased in relation to this volatility.”

A private sponsor phoned JLL at the start of the year with a time-sensitive request to secure $98.6 million in 5-year, fixed-rate debt financing. Treasury yields then rose sharply in late January, causing sudden concerns over reduced loan proceeds. Within a month, we presented pricing for a swaption contract that would pay additional proceeds based on the level of the benchmark 5-year Treasury. JLL’s Capital Market team quickly prepared the necessary documents and onboarded banks willing to sell the swaption.

Final indicative pricing was provided in March and an auction was conducted for the hedge contract. The sponsor bought the swaption from a leading investment bank for $600,000. The fixed-rate debt priced in early April and the hedge was terminated. The 5-year Treasury moved up 65 bps and the sponsor received $2.8 million in hedge proceeds to offset the decline in loan proceeds. Had the 5-year Treasury fallen below the protection level of 4.05%, the sponsor would owe nothing on the swaption settlement and the borrow could fund at the lower treasury rate.

Interest rate swaps and swaptions typically require a borrower to access bank capital with a financial institution that offers derivative products. Absent that, the products available primarily taper to interest rate caps and corridors.

For established private investors looking to explore bank financing and derivative products to quantify and reduce rate risk, having deposits with a commercial bank and using other related services can give them a competitive advantage. Doing so can free borrowers up from restrictions tied to insurance payments while allowing them to lock in favorable pricing.

Unlike interest rate caps, swaps do not require upfront payments and offer greater flexibility to structure a contract to modify net interest payments. Other considerations for borrowers include single-asset backed financing vs. portfolio financing and doing recourse vs. non-recourse.

“There are hundreds of banks that offer borrowers interest rate hedge products (small, medium, and large),” said Jeff Klein. “Yet in the private capital space borrowers are typically only able to enter into swaps and other hedge products that require credit underwriting if they have debt outstanding with that bank and collateral, like real estate, available to pledge.”

Beyond bank and agency financing, debt funds and private equity lenders offer flexible financing structures that allow borrowers to hedge in other ways. In cases where borrowers may see a decline in loan-to-value (LTV) on a refinancing or recapitalization, preferred equity and mezzanine debt can help fill in the gaps.