Wanted to get some feedback on a term sheet we received from a bank lender (Top 10 bank AUM). We requested a fixed and floating rate option from the lender. We received a term sheet with a 7-year fixed option and a 1-month LIBOR option (floating rate) that required a swap. Has anyone seen a bank lender require a floating rate to have swap?
This was the first time I've ever seen a TS come through requiring the borrower to swap out a floating rate.
To add a little more color this is a permanent loan out of a bridge for a boutique unflagged hotel in a tertiary market.
Would love some feedback
Swaps happen all the time in scenarios like this. It's just a way for you, the owner of the property, to hedge against interest rate risk. If your swap is at 4.25% but your floating is LIBOR + 300 bps and you think Libor going to go up another 100 bps then it makes sense to lock in the rate at 4.25%. Often times you can swap a portion of the loan amount too. So on a $10m loan you could lock in $4m at 4.25% and let the other $6m float.
For everyone else in the forum - correct me if I'm wrong on any of this.
This is what I've seen. I've also seen lenders give the option to choose between the two. My question to you is - why would you want it float at this juncture anyway? Who knows how high rates can go up in the next 7-years.
You would want it to float normally. The swap rate is generally a lot higher (at the time of the loan commitment) than the floating rate. It's high enough to make you consider letting it float yet low enough to make you consider fixing it in at a swap.
Thank you for this. I understand how it works, but have never seen it presented as a "must". Seems pointless to even present a floating option if that is the case. Just making sure I'm not misinterpreting this or if others have seen this as a requirement.
The logic behind the floating was if we were going to sell. Being that we're an unflagged hotel, we believe we have 2 more years before we reach full value. At that time the floating option gives us the flexibility to sell the asset without the breakup penalty and cash flow more during the interim period.
I know there are positives and negatives to both (i.e. fixed may make sense in a rising rate environment being that the loan is fully assumable), but in our experience we've seen most of the buyers that're willing to pay top dollar don't want to assume 60%+ leverage on a hotel. Would love some feedback if anyone thinks differently.
My clients are all borrowing up to 65ltv on long term fixed rates. Long term we still feel cap rates are going to go up almost in lockstep with interest rates. Lenders have been somewhat resistant in following treasuries upward this last few months. Many banks/lenders are simply accepting smaller margins. That can't last forever.
A couple of years from now, it's very possible that a 65ltv loan with a low fixed rate will in fact be an 80ltv loan available for assumption if you chose to sell. In a high cap environment, having below market fixed rate debt will help you. Again, only if you need to sell.
I'm not an ARM/Floater guy.
Sorry to keep throwing these out, but those that use swaps do you usually get multiple quotes from different derivatives groups?
Use Chatham Financial. The banks rates desk will try to arb you, and unless you have ISDAs already setup, it's not really worth going through the hassle of putting banks in comp.
When we quote floating rate product we typically quote a spread over 1ML, and then require that the Borrower purchase a LIBOR cap for the duration of the loan
Require the cap if the borrower does not buy the swap?
If swap isn't executed and borrower floats a LIBOR cap would normally be required at a negotiated strike.
Floating Rate vs. Fixed Rate Lending (Originally Posted: 04/19/2018)
Can somebody please get into some details about floating rate vs fixed rate lending? Which lenders will offer each, under what circumstances, etc.
mrjay88 does the terms heat specify whether it is a plain vanilla float to fix swap or a balance guaranteed swap? I wouldn't be surprised at all of it were of the BGS variety.
Also, what's the tenor of the swap term? 2 years/ co-terminus with the initial maturity?
It does not say. I'm not familiar with a balance guaranteed swap.
Co-terminus maturities.
It’s a bit hard to chacterize who offers what. Generally, lenders will have different lending ‘programs.’ This means they may have fixed rate and floating rate money to lend. Generally, floating rate loans are used for value add projects and development as they will usually have more prepay flexibility and be cheaper (lower spread). It’s a more ‘aggressive loan.’ In reality, although it may have a lower spread, this is all market driven. The more competition for a deal from the financing side, the lower the spread may go or the lenders may put in place less structure to make the deal more favorable to a borrower so that they are chosen as the lender. One can have an hours long debate on if lenders are getting paid appropriately for their risk when this occurs, but that’s another conversation. But in general, floating will be cheaper than fixed. If you go to a lender’s website, you can usually see their loan criteria and many offer a base ‘term sheet’ of what they look to lend on and what their criteria is as well as the structure they may put into place.
Lenders who use a floating rate program may also require a borrower to get an interest rate swap. This allows the lender to not hold the interest rate risk, while also helping to control the credit risk of the borrower.
can u explain the swap in further detail? When would the swap occur? What happens if rates go down/up?
HY notes are fixed. Investor base is primarily larger money managers.
Mezzanine tranches are usually fixed. Investor base includes BDCs, private credit/opportunisitc funds
Syndicated 1L/2L debt is floating. Investor base includes banks, private credit funds, CLOs, etc.
Would a real estate company have more floating or fixed debt? Why? (Originally Posted: 10/11/2014)
Would a real estate company have more floating or fixed debt? Why?
I'm guessing floating because mortgages are also floating so it would make it easier to match payments?
Don't forget for swaps that the individual owner if there is one has to have a good balance sheet and have over like 3mm in assets on a balance sheet.
Are there usually any PGs required on the swaps? This is my first transaction of the sort.
No, but you'll have to put up margin. But somethings not adding up. Does it explicitly say who is going to have to enter into the contract? Is it your firm or the the SPE borrowing entity? This is actually matters.
If it's your firm, as a lender, how do I compel you keep that swap on (aside from covenants), and for the benefit of the loan at all times.
But if it's the SPE that enters into the contract, it's most likely bankruptcy remote, so in the event of a default and liquidation of the loan, the swap would need to be unwound, so who would pay the breakage costs if the swap went against you? That's where a balance guaranty swap comes into play, and a third party, after underwriting the real estate credit, will agree to take over the swap in the event of a default, but they charge for that.
Typically, it's borrowers who want to engage in the swap to convert their floating rate liability into a fixed one. If this loan is being held for investment (ii.e. not securitized), the bank should only want a LIBOR cap, to prevent loan stress from rate increases.
They should be indifferent between you paying a fixed rate to a third party who converts it to floating which is paid to the bank ,and you paying floating, with a LIBOR cap, directly to bank subject.
Would you mind posting the exact language in the termsheet regarding the swap? I'm happy to help/offer advice, just need more info.
Most mortgages are fixed, not floating. The firm I work for tries to stay at 85% fixed 15% floating on stabilized assets but we're probably at 20%+ floating due to the fact we were long on LIBOR staying quite low for some time about two years ago. So far they've certainly paid off.
I'd say a closed end fund buying stabilized assets will be much closer to 100% fixed. The more a fund gets into value-add and redevelopment plays the more floating rate debt they will have.
That being said, my guess is that anyone who is buying a CBD Multifamily tower in a core market for a 4% cap is probably taking out floating rate debt.
It really depends on the fund. Based on the current environment, companies that do repositions/value-add or have shorter holding durations will usually use floating debt since its significantly cheaper. Longer term holds require fixed rate debt since there is too much risk of rates rising. My company uses pretty much all fixed rate debt.
Thanks for all the replies. Can I just ask what repositions are?
My firm has had a hugely active year with four acquisitions and one refi in the $160m-$400m range, and we have been doing a lot of floating debt at 175-200 bps over LIBOR. Several of the deals have to be repositioned to juice the NOI and it usually takes a few years to accomplish, so we keep the debt service as low as possible. Been doing interest-only on both fixed and floating. We have also done several $20m-$60m deals but I am not sure how those have been financed as I do not deal with those.
My REIT uses 100% fixed rate debt. The only "variable" rate debt is the line of credit. (which gets paid down pretty quickly with equity offerings).
I think it depends on the type of organization, the type of investing, and the interest rate market. My group is a developer/investor that rarely sells, so it's all about refinancing its portfolio right now into 20-25-year fixed-rate debt (usually through life insurance companies). But as has been mentioned in this thread, there are some obscene deals right now in the variable rate market. I've seen 3 to 5-year term debt with floating rates beginning under 3.00%. So it really depends on your organization's overall strategy.
I think overall, however, the majority of investment real estate debt is fixed.
Real estate company is way too broad. A developer might have all floating-rate construction loans outstanding.
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