REPORT FROM THE U.S.—Faced with a competitive transaction environment, most lenders have stopped pushing for Libor floors, according to transaction and lending experts.
While the use of such floors was common during the past few years, the return of more favorable spreads has made them obsolete in most cases.
“A year ago almost every deal had a floor. Today most do not,” said Daniel Peek, senior managing director of Holliday Fenoglio Fowler LP, a commercial real estate capital intermediary.
The floor concept, he added, came when Libor dropped too low and banks were accurately compensated for the overnight cost of capital.
“Most of the Libor-indexed loans I am working on do not have an associated index floors, but there are certainly loans that may require such,” said Gavin Davis, senior VP of debt and equity finance at CBRE Hotels.
“The broad answer to that is no,” said Matt Comfort, executive VP at Jones Lang LaSalle. “Most lenders have stopped pushing for Libor floors, but it’s not entirely uncommon for a lender to ask for it and it to be negotiated out in the term sheet process.”
Floors provide an additional way to get spread, he added.
But as the market has improved, borrowers have more leverage, Comfort said.
Borrowers “never loved the concept of a Libor floor,” he said, adding they prefer to have all the economics of a loan laid out up front and don’t like to pay for an artificially inflated Libor.
The six-month Libor rate was 46% last week.
Seeking spreads
While interest rates over Libor vary considerably, they’re generally falling within 300 and 400 basis points, said Steve Hennis, director at STR Analytics, sister company of the Hotel Investment Barometer.
Peek said best-in-class hotels in major markets are seeing spreads inside of 300 basis points. Value-add opportunities with lower cash flows could be in the 500 to 600 range.
“Cash flow and sponsorship dictate the pricing,” he added.
“Broadly speaking, floating rate loans right now are somewhere in the range of Libor plus 400 to Libor plus 550,” Comfort said.
Credit spreads might also be impacted by other forms of credit enhancement, such as personal recourse, Davis said.
“Non-recourse credit spreads in general have materially declined beginning after Labor Day in 2012 subsequent to the Federal Reserve’s (third round of quantitative easing) announcement and implementation thereafter,” he added.
Scandalous impact?
Libor in and of itself was thrust into the spotlight during 2012 when multiple criminal settlements by Barclays Bank revealed significant fraud and collusion by member banks connected to the rate submissions.
While the events that followed occupied headlines the world over, lenders and borrowers were not deterred, sources said.
“We’ve done about $3 billion in volume in the last two years that’s hotel financings,” Comfort said. “I didn’t encounter any pushback on Libor because of the scandal once. That has not been a material issue for the lenders or the borrowers.”
He said the transgressions were carried out on the secondary markets, which insulated any fallback in direct lending.
“We have not seen, nor do I expect, the Libor rigging scandal to have any effect on the utilization of Libor as an index rate. A variety of loans utilizing Libor as an index rate can be categorized across the full spectrum of real estate risk from core through value-add and opportunistic investments,” Davis said.