If you`re a borrower looking to secure a credit agreement, you`ll want to pay close attention to a clause known as the „LIBOR floor.”
LIBOR, or the London Interbank Offered Rate, is the interest rate that banks charge one another for short-term loans. It`s also one of the most widely-used benchmarks for determining interest rates on loans and credit agreements.
However, in recent years, the LIBOR rate has dropped to historic lows. As a result, many lenders have started incorporating LIBOR floors into their credit agreements in order to ensure a minimum interest rate.
A LIBOR floor is essentially a minimum interest rate that lenders can charge borrowers, regardless of how low the actual LIBOR rate drops. For example, if the LIBOR rate is at 0.5%, but the borrower`s credit agreement has a LIBOR floor of 1%, they`ll still be charged 1% interest.
This can be a double-edged sword for borrowers. On one hand, a LIBOR floor can provide some certainty and stability in a low-interest rate environment. On the other hand, it can also mean that borrowers are paying more than they would if the LIBOR rate dropped even further.
It`s important to note that not all credit agreements include a LIBOR floor, so borrowers should carefully review their loan documents before signing on the dotted line. Additionally, borrowers should also consider whether a fixed interest rate or variable rate loan may be a better fit for their financial situation.
Overall, while a LIBOR floor may provide some stability in a low-interest rate environment, it`s important for borrowers to fully understand the implications of this clause before agreeing to a credit agreement.