How a floating-rate loan is priced
Floating Rate = Reference Rate + Spread
A floating-rate loan resets its interest rate periodically (typically monthly or quarterly) based on the reference rate at reset time. For example, a corporate loan at 'Term SOFR + 250 bps' (where 'bps' is basis points — one-hundredth of a percent, so 250 bps equals 2.5 percentage points) with Term SOFR at 4.0% means the borrower pays 4.0% + 2.5% = 6.5% all-in (the total annual rate). When Term SOFR moves to 4.5% at the next reset, the all-in rate moves to 7.0%. The spread (the 250 bps margin above the reference rate) stays fixed; the reference rate varies.
Why SOFR replaced LIBOR
LIBOR was based on a daily survey of a panel of banks — 'what would you charge me to borrow overnight?' — and could be (and was) manipulated by panel banks who had positions in LIBOR-referencing derivatives. The 2012 LIBOR scandal exposed years of coordinated rate-fixing; cumulative fines and settlements exceeded $9 billion across the major banks (RBS paid $612M, Barclays $453M, UBS $1.5B, Deutsche Bank $2.5B, and other settlements through 2015). SOFR is transaction-based — it is computed from ~$1.5 trillion per day of actual Treasury repo transactions, not from survey responses. The rate is much harder to manipulate because it reflects real trades.
Compare SOFR against the Fed Funds rate
SOFR. Then look up the current Fed Funds rate (FRED series DFF). The two typically run within 5-15 basis points of each other — SOFR usually slightly BELOW Fed Funds (because SOFR is collateralized and Fed Funds is unsecured), though in periods of secured-funding tightness SOFR can run above Fed Funds, particularly at quarter-end.Overnight SOFR versus Term SOFR
Overnight SOFR is published daily by the New York Fed as the actual transaction-weighted rate from yesterday's repo trades. Term SOFR is a forward-looking estimate of average SOFR over a future period (1-month, 3-month, 6-month, 12-month) — published by CME for predictability in lending. Most floating-rate corporate loans now reference Term SOFR because borrowers want to know their interest rate for the period ahead, not after the fact. For the full mechanics of interest-rate swaps and the LIBOR-to-SOFR transition, see deriv-5 'Interest Rate Swaps: The World's Largest Derivative Market'. For how SOFR flows into the cost-of-debt component of WACC, see corpval-2 'Cost of Debt: What Lenders Actually Charge' (advanced 301-tier; requires dcf-201 and credit-201 as path-prereqs).
Sit with the ideas.
Atlantic Industrial signed a $500M revolving credit facility in 2019 at 'LIBOR + 200 bps' when 3-month LIBOR was 2.5%. After the 2021 transition, the loan documents converted to 'Term SOFR + 200 bps + 26.161 bps ARRC credit spread adjustment' (the ARRC adjustment for the 3-month tenor). Today, 3-month Term SOFR is 4.0%. What is Atlantic's all-in rate today, and why did LIBOR end?