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Pensford Places The First “Term SOFR” Cap

November 18, 2021

Executive Summary – banks are now selling caps based on “Term SOFR” and pricing is inline with that of other indices.

Pensford is pleased to announce its part in the execution of the first “Term SOFR” indexed interest rate cap for a commercial real estate borrower.  The ARRC formally recommended CME Term SOFR for use in late July 2021 and since then banks have been working to get set up to trade hedges based on the index.  At least two third party providers are now in a position to trade Term SOFR with many more expected to enter the market over the coming months.  This is yet another big step towards the transition away from LIBOR to alternative reference rates.

The Term SOFR cap executed today traded at approximately the same cost as a comparable cap based on NY Fed SOFR.  We priced various $25mm caps this afternoon ranging from 3-5 years and most Term SOFR structures were just $5-10k more expensive with a slightly higher premium for longer terms.  This spread is subject to fluctuate but helps alleviate concerns that the index might be materially more expensive due to lack of market depth.

If you’re having trouble keeping apart the various SOFR rates, check out our “The Different SOFR Rates” resource here.

Need help executing a SOFR cap or weighing options as you work through the transition?  Contact the team at pensfordteam@pensford.com or 704-887-9880.

Pensford