For the interest rate on those loans to rise the benchmark rate, LIBOR, needs to rise to a point where the rate (LIBOR plus spread) breaks through that minimum rate or the ‘floor’ of these loans. The key aspect of this is when the rate does rise enough to be above the interest rate ‘floor’ the lenders get the benefit of a rising rate. Meanwhile, the loans with floors are earning above market yields due to the ‘floor’.
There are many other aspects of risk and reward related to the senior loan and high yield corporate bond markets that can be discussed in additional posts.
This article was written by J.R. Rieger, Global Head of Fixed Income, S&P Dow Jones Indices.
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