I guess I have had more experience pricing interest rate caps over the past year than I have looking at swapping out floating rate SOFR debt with fixed rate.
Assuming I am seeking a 5-year loan, which is being quoted floating at 350 over 30-day SOFR (8.8% starting as of today), and I wanted to fix the rate for first 36 months, would I look at the 3-year 1-month term SOFR swap rate plus the spread to arrive at the fixed rate? After the 36 months, would the remainder of the loan term revert back to floating? Or would I be required to swap for the entire duration ( 5 years) of the loan term?
You've got it right. I think the 3-year swap is at ~4.5% today so would end up at an all in rate of 800 with a 350 over spread. We typically allow a borrower to buy any kind of interest rate hedge through initial maturity (I think you're describing a 3+1+1), but as an extension covenant require that you buy an interest rate hedge (cap/swap/collar) at loan extension. Only difference outside of fixing your base rate is the counter-party risk the bank has should your swap be in the money. Hope that helps.
The above comment is mostly right. Do need to ask, are you looking at SOFR NYFED 30A or term SOFR? They are different. Additionally offer right now on term SOFR is extremely high compared to SOFR compound so that is something to consider. I work on a rates desk and trade swaps/caps etc all day long so feel free to ask any further questions.
Thanks Liam. Are you and your brother talking? Saw you guys play the Hollywood Bowl in 2005 and it was an experience.
Question: Assuming a 5 year base loan term, if borrower wishes to swap floating to fixed, would it need to be priced using the 5 year swap rate, or could borrower swap for a portion of the 5 year term and then allow rate to go back to floating?
Hay not too many people get the reference. Lucky bastard, still waiting (hoping) to get the chance to see them myself.
You can swap for whatever term you want, whether you have an underlying loan or not (unless we’re talking about term SOFR which in that case you do need one).
Could you explain briefly the approach to pricing say a 7 year term 5 years fixed
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