Floating rate debt

Extracted Attributes

• Risk Allocation

  Interest rate risk is borne by the borrower

• Prepayment Terms

  Often features no prepayment fees

• Alternative Names

  Variable rate debt, adjustable rate debt, bank loans, senior loans, leveraged loans

• Primary Benchmark

  Secure Overnight Financing Rate (SOFR)

• Reset Frequencies

  1, 3, 6, or 12 months

• Protective Features

  Interest rate caps or limits on maximum changes

• Initial Rate Advantage

  Typically 0.25% to 1.5% lower than fixed-rate options

Timeline

• LIBOR phase-out completed for new contracts, solidifying SOFR as the primary benchmark for floating rate debt. (Source: Web Search (Clearly Acquired))

  2023-06-30

• The All-In Podcast hosts critique the use of floating rate debt in Adam Neumann's Flow venture during the Davos summit. (Source: Document fb009ead-fe3d-4f58-bfc8-0a9d2c19cec9)

  2024-01-17

• Start of the projected 'maturity wall' where a significant volume of corporate floating rate debt is due for refinancing. (Source: Web Search (Crystal Funds))

  2026-01-01

• End of the critical 2026-2027 maturity window for outstanding floating rate corporate leverage. (Source: Web Search (Crystal Funds))

  2027-12-31

Floating interest rate

A floating interest rate, also known as a variable or adjustable rate, refers to any type of debt instrument, such as a loan, bond, mortgage, or credit, that does not have a fixed rate of interest over the life of the instrument. Floating interest rates typically change based on a reference rate (a benchmark of any financial factor, such as the Consumer Price Index). One of the most common reference rates to use as the basis for applying floating interest rates is the Secure Overnight Financing Rate, or SOFR. The rate for such debt will usually be referred to as a spread or margin over the base rate: for example, a five-year loan may be priced at the six-month SOFR + 2.50%. At the end of each six-month period, the rate for the following period will be based on the SOFR at that point (the reset date), plus the spread. The basis will be agreed between the borrower and lender, but 1, 3, 6 or 12 month money market rates are commonly used for commercial loans. Typically, floating rate loans will cost less than fixed rate loans, depending in part on the yield curve. In return for paying a lower loan rate, the borrower takes the interest rate risk: the risk that rates will go up in future. In cases where the yield curve is inverted, the cost of borrowing at floating rates may actually be higher; in most cases, however, lenders require higher rates for longer-term fixed-rate loans, because they are bearing the interest rate risk (risking that the rate will go up, and they will get lower interest income than they would otherwise have had). Certain types of floating rate loans, particularly mortgages, may have other special features such as interest rate caps, or limits on the maximum interest rate or maximum change in the interest rate that is allowable.

Web Search Results

• An introduction to floating-rate loans

  These loans are designed with interest rates that adjust to market rates. Floating-rate loans are a form of debt financing typically negotiated between a group of banks and a corporation. They’re often extended to companies with higher levels of debt compared to cash flow, carrying a greater credit risk than investment-grade bonds. While floating-rate loans are below investment-grade (or below BBB-) quality, they’re higher up on the capital structure and secured by the issuer’s assets so they [...] have higher recovery rates in the event of a default. Floating-rate loans are also known as bank loans, senior loans, leveraged loans and syndicated loans. [...] considered lower credit quality than investment-grade bonds and, consequently, have historically paid higher yields to investors. Higher recovery rates in default situation: Floating-rate loans are typically secured by collateral and have a senior position in a company’s capital structure, meaning that they have a higher priority claim on the borrower’s assets versus other creditors.

• Floating interest rate

  A floating interest rate, also known as a variable or adjustable rate, refers to any type of debt instrument, such as a loan, bond "Bond (finance)"), mortgage, or credit, that does not have a fixed rate of interest over the life of the instrument. [...] In business and finance, a floating rate loan (or a variable or adjustable rate loan) refers to a loan with a floating interest rate. The total rate paid by the customer varies, or "floats", in relation to some base rate. The term "Maturity (finance)") of the loan may be substantially longer than the basis from which the floating rate loan is priced; for example, a 25-year mortgage may be priced off the 6-month prime lending rate. [...] Floating rate loans are common in the banking industry and for large corporate customers. A floating rate mortgage is a mortgage with a floating rate, as opposed to a fixed rate loan.

• Fixed vs. Floating Rates in LBO Debt

  Unlike fixed-rate debt, floating-rate financing adjusts based on market trends. This approach can lead to cost savings but also comes with some variability. ### How Floating Rates Work Floating rate LBO debt adjusts according to market conditions. Its structure typically includes: A benchmark rate (commonly SOFR) since LIBOR's phase-out) A fixed spread added to the benchmark rate Adjustment periods (monthly, quarterly, or annually) [...] Lower Initial Rates: Starting rates are often 0.25-1.5% lower than fixed-rate options. No Prepayment Fees: Borrowers can repay early without incurring penalties. Potential Savings: Costs decrease when interest rates drop. Flexibility: Easier to refinance or restructure without being locked into a fixed rate. ### Risks of Floating Rates Despite its benefits, floating-rate debt has notable risks: [...] Using a mix of fixed and floating rates in LBO debt structures helps manage interest rate risk. This strategy divides debt into different portions: Term Loan A: Fixed rate (40-60% of total debt) Term Loan B: Floating rate (25-35%) Revolving Credit: Floating rate (10-20%) This combination balances capital costs with flexibility. Each type of debt is tailored to its specific purpose and duration, creating a solid foundation for managing risks with targeted rate protection tools.

• Floating Rate Debt in a High Rate World

  outstanding and an additional $190 billion of new collateralized-loan obligations (CLOs) priced last year, floating-rate finance is no niche backwater—it is now the backbone of corporate leverage.1, 2 Whether it remains a safe harbour or turns into a storm surge depends on what happens between now and the looming maturity wall of 2026-27. [...] Source: Morningstar LSTA Leveraged Loan Index Analysis (Sept 2024) - LSTA - LSTA - ## Floating Rate Debt: Borrowers Are Paying a Steeper Bill [...] Floating-rate debt has earned its reputation as a portfolio stabilizer, but its very resilience can lull investors into ignoring the pressure building on the other side of the ledger. Every month that SOFR holds above four percent chips away at corporate cash flow and inches the maturity wall closer. Whether floating paper proves a safe haven or a hidden risk will hinge less on the direction of rates than on the depth of investors’ appetite when the refinancing bill finally comes due.

• Floating Rate Debt | Ares Wealth Management Solutions

  The type of debt discussed here will be termed “Floating Rate Direct Loans,” meaning loans that have the following characteristics: Let’s look at how each of these characteristics contributes to returns that have historically been both resilient and relatively protective of downside risk, resulting in a potentially attractive investment in a rising rate environment or even dislocated markets. ## Resilient returns ##### Floating > fixed [...] Through our in-depth research on the topic, Ares has found that Floating Rate Direct Loans can help drive returns that are resilient and relatively protective of downside risk, resulting in a potentially attractive investment in a rising rate environment, both during and after potential market dislocations. We summarize what you need to know in our latest Private Markets Insights newsletter. Floating Rate Direct Loans defined [...] By pegging the coupon rate to the market, sensitivity of the price to changes in interest rates is nullified, holding all else equal. In addition, Floating Rate Direct Loans often have shorter contractual maturities of 5-7 years with a weighted average life of ~3-4 years compared to long-dated corporate bonds. Another way to say this is that the effective duration is low. This means these assets can deliver incrementally higher investment returns and current income as base rates increase