Does Your Fixed To Floating Rate Security Have a Libor Floor?

A few of our astute readers (sorry lost track of who these folks were) commented recently that baby bonds of the First Internet Bancorp (INBK) have a clause in the floating rate reset determination section of the prospectus that states the following–

The key part is the last sentence which reads ‘if the benchmark rate is less than zero, then the benchmark rate will be deemed to be zero’.

While I don’t expect that we will see a zero 3 month Libor rate anytime soon, I also didn’t think we would see a 10 year treasury under 1%.

What this means is that if 3 month Libor went negative you would have a ‘floor’ coupon of the spread used to set the coupon rate. For instance the First Internet Bancorp 6.0% baby bond (INBKL) has a spread of 4.85% which will be added to 3 month Libor. Thus 4.85% will be the lowest coupon this floating rate issue would be reset at.

I did some random looks at other mREIT issues and did not find the language that set the 3 month Lior floor at zero.

This is likely not a big deal–BUT you may want to know if you have a floor on your floating rate issue–the details are in the prospectus of each issue.

13 thoughts on “Does Your Fixed To Floating Rate Security Have a Libor Floor?”

  1. I found another one in my risk drawer (that’s well WELL below my sock drawer in my chest of drawers) that I was surprised to see has a floor – XAN-C can only float UP from it’s 8.625% initial coupon – “From 7/30/2024, distributions will be paid at a floating rate equal to three-month LIBOR plus a spread of 5.927% per annum, provided that such floating rate shall not be less than the initial rate of 8.625%.”

    1. Good job 2WR. I only surveyed a few mREITs and didn’t find anything, but it is something to keep my eyes on in the future.

  2. As an empirical matter very few exchange traded U.S. F2F have floors. There are a few floaters with minimum rates out there (look at BML-H as an example) and some of those minimums are actually looking good.

    Some Canadian preferred, about 30 in number, are F2F (actually 5-year resets) with minimum rates equal in all cases to the initial coupon rate. They can go up in coupon, but not down. For once, the optionality is with the investor. No comparable U.S. issues to my knowledge. The few U.S. issues that are 5-year resets all lack minimums.

  3. I was thinking that at the end of this crazy search for safety maybe going short T-bonds would be one of the best investments.

    1. Gabriele, take a look at DTYS, Ipath US Treasury 10yr Bear ETF, it might be a T-bond short intstrument to consider. The charts of DTYS and $TNX are almost a match. When rates start back up DTYS will rocket to the moon! It is scary volatile!

  4. I was hoping all you wise folks here could please enlighten me about the philosophy on companies issuing fixed to floating issues. My assumption has been part of the reason they issue fixed to float is limit costs of reissuing going forward and attract investors to purchase who are fearful of locking in to fixed issues with low coupon rates. Should I assume that fixed to floating issues are less likely to be called (assuming that the LIBOR spread is reasonable)? Thanks!

    1. Tex – The question is what LIBOR spread is reasonable??? I’m thinking that even if an issuer is coming up on a f/f date where they will begin to float and the float rate would be lower than the original coupon, the issuer would still have an incentive to call and refinance if they can do so with a lower +LIBOR rate… My example is CUBI-E 6.45% which will float 6/15/21 at LIBOR + 5.14. CUBI’s last f/f issue was done at LIBOR + 4.76, so if they can achieve that +4.76 or better on a refinanced call, they have an incentive to call E whether or not the beginning float period saves them money or not. Costs and accounting might get in the way for all I know, and I suspect 34 basis is not wide enough to pull the trigger in of itself, but still the large + LIBOR rate for the E issue makes it a higher likelihood for call candidate than others from the same issuer, especially on a credit like CUBI that I believe has come a long way in the past 3 1/2 years since issuing their last f/f preferreds. As an aside on CUBI specifically, they’ve harped about the benefits to shareholders of calling in all their preferreds when possible in practically every past quarterly CC for over a year.

      1. CUBI is going to call everything. When you look at the various CUBI issues focus on YTC in conjunction with time to call. There are frequent mispricings among the issues but those change minute to minute on some days. One has to be very fast with the mouse with CUBI.

        1. Agreed, Bob. The question is going to be timing…. CUBI-C is first with 6/15/20 first call date then the rest begin 9 months later starting 3/15/21. I’m wondering if they might bunch the ’21 calls until 6/15/21 or later or even wait to do the remaining 3 on 12/15/21 when CUBI-F becomes callable…Either that or they’ll call with cash on hand on each date since they want the benefits of not having any preferreds outstanding to all fall to the bottom line for shareholders …I know they’ve figured the benefit to be something like 45 cents per share… I ended up buying 800 CUBI-C today at 25.125 average which provides a 4.21% YTC conservatively figured taking into account the next 10 days that accrue nothing to me… I figure it’s a nice parking spot for short term money that only gets better should they not call immediately.

    2. As an investor who remembers way back in 1980-1981 era when the 30 year T-bond was trading at 15.5% and 3-month bills at 21%, I hold a lot of F/F issues because of my experience. I’m always worried about holding a fixed 5-5.5% coupon if inflation eventually takes off. That might not be rational, but I can live with my decision. When things go crazy and credit spreads widen very quickly, like in late 2018 and just recently, I will sell issues close to call date and buy ones with 5+ years to call date, which have dropped sharply. It seems to work for me.

      1. Like Randy Eyler, I remember 15% interest rates, and used to wonder if they might come back some day. But now, I have to adapt to a new way of thinking. Two years from now, when the Fed is propping up the stock market with low short term rates and 3mL falls to -2%, am I going to be happy with 5% over 3mL and getting only 3%. And 10 years from now, when the Fed initiates QE27 in order to keep the Dow above 70,000, driving 3mL to -10%, am I going to be happy with my -5% return? Will I have to send quarterly payments to the issuer? At that point, perhaps I’d be better off diving into Tesla at $8000 per share and hoping for the best.

      2. I remember those days well. I was increasing my rate of return by writing checks among a half dozen high interest MMF accounts – interest accrued instantly on the new deposit plus interest would accrue in the debit account until the checks cleared. In those days it was a week for checks to clear. Very sweet.

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