Newbie question on LIBOR referenced in loan spreads
This is a bit of a dumb question - but when you see loans with spreads, so like senior debt L+400 or sub debt L+800, how do you know right away which LIBOR rate it's referring to? Do you just go by the length of the debt? So if it's a 5 yr term loan it's the 5 yr LIBOR + spread? Or when LIBOR is referenced, it's usually one particular maturity that people have in their minds?
Thanks.
In my space at least, it is usually a 1-month LIBOR.
There's no such thing as 5-year LIBOR. Are you thinking of the 5-year swap rate?
If I remember correctly, 3 month libor is very common for interest rate swaps. But it is always specified in the term sheets.
For syndicated corporate loans it's usually 3-month LIBOR though credit agreement often allow the borrower to elect to use other base rates under certain circumstances (many also have a different spread that's prime+).
3ML
For swaps it definitely varies. I mostly see 1ML and 3ML vs. fixed as the most common...
For leveraged loans/senior debt etc. with variable rates (what the OP is asking about), I think they match it to the loan interest payment structure...The companies I cover usually go with LIBOR that resets between 1 and 6 months and will also use caps and floors.
Thanks everyone for all your responses so far. I've just started looking through LBO models and noticed that for term loans/debt that amortizes, it's L+spread, and the models or references don't tell me which LIBOR they are referring to. It sounds like in many cases, it's 3mth LIBOR... or as Flake suggested, it may match the loan payment structure. So if payments happen quarterly then it's 3M LIBOR?
Kenny: When/in what circumstances is prime+ used instead?
If you can reference bottles of wine in indices than surely you can reference any libor
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