Floating Rate
Private Credit glossary · Documentation, Covenants & Terms
Definition
Interest rate resetting periodically to a benchmark plus a fixed spread, typically r = max(SOFR, Floor) + Spread. The SOFR floor (commonly 0.75%–1.00%) is an interest-rate option held by the lender, worth 10–30 bps in present-value terms in normal rate regimes. Floating-rate structure gives middle-market direct loans an effective duration of sim 0.1–0.25 years vs. sim 4 years for fixed-rate high-yield bonds — the central reason direct lending outperformed in 2022–2023.
Floating Rate in plain English
Some loans charge interest that doesn't stay fixed — it 'floats,' meaning it resets every few months to follow whatever the going market rate is. It's built as a public benchmark rate (called SOFR) plus a fixed extra amount the lender always earns, called the spread: r = max(SOFR, Floor) + Spread. The 'floor' is a safety net that keeps the benchmark part from dropping below a set minimum (often 0.75%–1.00%), so the lender still earns a decent rate even if market rates crash. The huge advantage: because the rate updates constantly, these loans barely lose value when interest rates rise — that's exactly why they beat fixed-rate bonds badly in 2022–2023, when rates shot up. It's like a thermostat that adjusts to the weather instead of blasting the same setting all winter.
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