12 Month or 3 Month SOFR on LBO model
When modeling bank debt in LBOs should we use the 12 Month or 3 Month SOFR rate for interest rate in projected years?
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I'd match it up to how your interest schedule is modeled (i.e., quarterly vs. annually). In practice the Borrower will typically have the option based on if they want to pay interest monthly or quarterly which would be off of 1-Month or 3-Month SOFR.
Thank you for your reply.
On a take home case study - what should I use? 3 month?
I assume you're projections are annual, not quarterly, so the 12-month would be the appropriate base. If you want to impress and have your model be similar to how it is on the job I would suggest quarterly.
Thank you for clarifying. I ask 3 vs. 12 month, because I'm yet to find a 12 month SOFR fwd rate. Any idea where to find it publicly / free?
I've never heard of someone using a 12-month SOFR so I'd advise you to use the 3-month. If you don't want to build a full quarterly model I'd just build a separate interest expense schedule that's quarterly and pull the annual sum into your annual model.
Here's where you can find a SOFR curve:
https://www.chathamfinancial.com/technology/us-forward-curves
Use Pensford
1-month or 3-month fwd curve only
FYI the time horizon is forecast blocks, not the actual denomination you get the forecast in - which will be monthly
If you're build a model and your numbers are annualized just take the average of your 12 3-mo LIBOR rates per year
Doesn't really matter... you won't get dinged / accepted for doing it one way vs the other
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