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Wednesday, 27 November 2019

Libor Floors Show Value as Benchmark Rate Continues Decline

Libor floors lately have proven to be godsends for alternative lenders, providing them with downside protection as the benchmark one-month Libor rate has declined steadily since the end of last year. The rate, which had peaked at 2.52 percent at the end of last year, has steadily dropped and this week was 1.72 percent.

Commercial Real Estate Direct Staff Report

Libor floors lately have proven to be godsends for alternative lenders, providing them with downside protection as the benchmark one-month Libor rate has declined steadily since the end of last year.

Benefit Street Partners Realty Trust Inc., for instance, noted that a 25 basis point drop in one-month Libor, or London Interbank Offered Rate, during the quarter through the end of September would have translated to a 1.37 percent increase in the interest income it would earn. On the flip side, a 50-bps increase in Libor would have resulted in only a 0.68 percent increase in interest income.

And Starwood Property Trust, which placed Libor floors on all $1.2 billion of originations it completed during the latest quarter, noted that a 1 percent decrease in the benchmark rate would result in a 5 cents/share increase in its net interest income. And if rates were to increase by 1 percent, its earnings would increase by only 3 cents/share. A total of 84 percent of its $7.6 billion mortgage portfolio has floors.

The company said 25 percent of its Libor floors are "in the money," meaning they're higher than the actual Libor rate.

One-month Libor this week was 1.72 percent. It had bottomed out at about 15 basis points in the middle of 2014 before climbing steadily to 2.52 percent at the end of last year. It's declined consistently since then.

Lenders typically use Libor - at least for now, as the rate will be phased out by the end of 2021 - as a benchmark rate for...


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