SOFR (Secured Overnight Financing Rate)
SOFR is a common floating reference rate used as the base for U.S. loan pricing.
Allocator relevance: High — drives coupon mechanics and rate sensitivity in floating-rate private credit portfolios.
Expanded Definition
Loans often price as SOFR + Spread (Margin), sometimes with floors, caps, and day-count conventions. SOFR replaced LIBOR as a market standard in many contracts, making fallback language and reference-rate conventions a diligence point. Allocators evaluate how a manager underwrites base-rate risk, whether loans include floors that protect yield in low-rate environments, and how interest rate changes transmit to borrower coverage ratios (e.g., DSCR).
Decision Authority & Governance
Governance includes documentation standards (reference rate definition, fallback provisions), hedging policy, monitoring of borrower rate sensitivity, and covenant design that triggers earlier engagement under stress.
Common Misconceptions
- SOFR is fixed.
- SOFR alone equals borrower cost.
- Base-rate shifts affect every loan equally (floors/hedges differ).
Key Takeaways
- SOFR sets the base; spread sets risk compensation.
- Floors and fallbacks matter materially.
- Rate regimes change borrower coverage and default risk.