Recent Short-Term Rate Changes Prompt Borrowers to Sharpen Pencils on Pricing
Chicago, IL -- (ReleaseWire) -- 09/17/2007 -- During the subprime credit crunch of the past two months, most of the focus remains on loan performance and treasury rates. While these indices are accurate gauges of market conditions, a long-ignored index resurfaced on the watchlist -- LIBOR ( London interbank offering rate).
While treasuries and other domestic rates continued declining, LIBOR climbed more than 50 basis points during this time. Caught off-guard, realty borrowers quickly discovered this index moved in the opposite direction of Treasuries. LIBOR increased based on a variety of factors, including:
• International Bank Uncertainty: This index is the international bank pricing benchmark. Many European banks, for example, one US mortgage subprime debt. These banks are concerned about credit quality erosion and are protecting their portfolios, requiring higher risk premiums to reflect more uncertainty within the marketplace.
• Strong Demand: The high demand for floating-rate debt within uncertain market conditions allows institutions to capture larger rate premiums.
LIBOR's re-pricing forces borrowers to move from the floating-rate sidelines and reevaluate their capital needs/pricing using the following four guidelines:
1. Optimum Index: If floating rate debt is needed regardless, immediately review other indices including Prime and other government/bank indices. Should request the option to change indices during loan term.
2. Longer-Term Hold: A holding strategy will be more permanent (e.g. five years or more), redirecting financing towards fixed rate pricing. Fixed-rate pricing is over 25 basis points more price competitive than floating-rate debt given market conditions of mid-September.
3. Debt Value Enhancement: Belief in rising rates prompts the decision to capture permanent debt as such funding would likely enhance property values with "below-market” debt at a future date.
4. Project Dynamics: Floating-rate debt is required for repositioning selling assets. If the timeframe is relatively short, borrower should look into purchasing interest rate hedges.
According to John Oharenko, advisory board member of the Real Estate Capital Institute®, "Floating-rate debt based on LIBOR should be re-examined as a pricing index." He adds, "However, a financing decision should not solely drive property holding strategies, especially if sale or redevelopment is looming."
The Real Estate Capital Institute® is a volunteer-based research organization that tracks realty rates data for debt and equity yields. The Institute posts daily and historical rates, including LIBOR. Call the Real Estate Capital RateLine at 7RE-CAPITAL (773-227-4825) for hourly updates.