How do lenders set LIBOR floors?
What's the thought process behind lenders and how they set LIBOR floors? I'm in the market for debt and it seems that LIBOR floors are all over the place. Some quote no floors, others quote 1.00%, while others quote 2.00%.
I thought lenders made their money by have a "spread" over an index. Is a LIBOR floor just a cash grab by lenders?
Basically it's just a different way to quote it without having a really high spread. If the all-in is 3.70% and LIBOR is, say 20 bps, instead of having a 350 spread, it's a LIBOR floor of 100 bps plus a 270 spread.
It's actually not bad for the borrower to quote it that way, because with a floor, there's runway until their rate increases. (in the example above LIBOR would have to increase 81 bps for the all-in to increase if it was quoted with a floor and a lower spread. But, if quoted with actual LIBOR, the rate would increased immediately with LIBOR.)
Also depends on the prepayment is structured. If it’s Spread Maintenance vs Yield Maintenance/Min interest, the higher floor (all else being equal) means a lower prepayment penalty later
Are they all over the place in recent deals or deals across differing timelines that you've pulled together data on? This is corp fin, but I don't see LIBOR floors regularly in deals that closed w/in the last year and if I do, they haven't been over 1.0%. However, if I'm looking at deals from 2-3 years ago when LIBOR hung out in the 2.50% - 3.00% range, there were a lot more docs papered w/ 2.00% floors.
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