Bridge / Variable Rate Debt
Just received a quote for a 2-yr SOFR cap @ a 2% strike that shook out to a rough cost of +30 bps on an annual basis. For comparison, my usual rule of thumb in pricing these out before talks of rate hikes was an incremental borrowing cost of ~ 6 - 8 bps. The cap provider told me that today has been an absolute blood bath.
To those who have been transacting using floating rate / bridge debt, has your firm's outlook changed at all? Every post I see on dogshit RE Twitter has been super rosy talking about how they're not worried about future interest rate movement, but the market is clearly pricing in some serious volatility. These overnight rates like SOFR & LIBOR are going to have to move upward and relatively track the fed funds rate, no?
Got quoted a SOFR 1% cap for nearly $700k today on $25M bridge.
Yikes…
Monkey math here, but wouldn’t SOFR need to go above 3.8% in the span of a year before this cap provided any sort of value to your client?
What’s crazy is that these rate caps don’t settle until you’re at the closing table. So a deal that went under contract 60 days ago is having to pay those rate cap prices today to fund. Lender isn’t going to loosen up their cap floor at the 1 yard line.
SOFR forward curve is rising over 100bps by July in current forecast. The cap would apply to that.
I understand, but you’re essentially paying 280 bps upfront for a 1-yr insurance policy that only kicks in after you’ve gone above the strike rate. So in order for your premium paid to not be a sunk cost, you would need SOFR to be 280 basis points above 1%, no?
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