Yesterday I was thinking about why the bump in earnings to the floating rate debt / structure debt vehicles we own is modest given percentage rise in rates. In general, the people that will most benefit from rising rates in the lending world should simply be those that either own un-levered floating rate debt or lever their floaters with fixed rate debt.
One publicly traded vehicle we own estimated that distributable earnings will move up by 5% with a 200bp parallel shift in LIBOR. This is despite 3-mo LIBOR increasing dramatically:
After digging in a bit, it became clear that the majority of the leverage used to fund the assets are also floating rate facilities. To that end, the rate benefit comes from the small portion of the liability structure that is funded via fixed rate bonds.
As such, I expect more from these lenders in the form of being a capital provider when others are pulling back, capturing greater “spread” versus their liabilities.
While all of this is relatively elementary and most FI people will say “duhhh this is simple” – I always find it important for me to de-construct things that make me go “hmm, why?” either because I’ve forgotten or didn’t think about it before.