easy · Private Equity advanced-lbo

If the London Interbank Offered Rate (LIBOR) or Secured Overnight Financing Rate (SOFR) increases by 100 basis points, how does this impact a portfolio company's debt paydown schedule if its debt is 100% floating rate?

1. It increases the cash available for paydown since the tax shield offsets the rate rise.
2. It increases the required paydown because lenders mandate faster amortization in high-rate environments.
3. It decreases the cash available for paydown because higher interest expense reduces pre-tax cash flow.
4. It has no real impact at all because the company almost certainly holds interest rate caps or swaps in place.

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