Current Debt Market: Fixed vs. Floating

January 23, 2024

by a searcher from University of South Carolina in Charlotte, NC, USA

All,

I am currently wrapping up due diligence on a business acquisition and preparing for closing. Currently, I have sourced fixed-rate debt on the business, which I am happy with the terms and will be moving forward with. That being said, I would like to hear opinions from this audience as to which type of debt they are sourcing or would prefer in today's lending environment?

Generally, I believe a fixed-rate loan is preferential due to the predictability of the expense. For the most the of last two years rates have been unsteadily increasing, which has put stress on many recently acquired businesses with floating-rate debt.

Additionally, my company acquires multifamily real estate with a focus in affordable housing throughout the Carolina's. Currently, we are seeing many deals come to market due their upcoming loan maturity and difficulty to refinance . On the other hand, we are also finding deals with longer term debt, which allows for a favorable loan assumption. Would be curious to hear from others on this end as well as they are sourcing deals and funding going into 2024.

Feel free to comment below or reach out directly with any thoughts.

Thought it would be wise to add this based on some comments:

Our multifamily hold period is typically 7 years with a refinance in the 3rd year. Currently, only sourcing fixed rate debt.

Business acquisitions: currently 5 year hold, with plans to hold future acquired companies longer for the benefit of vertically integrating our real estate portfolio. Currently, have fixed rate debt on our upcoming acquisition, with plans to refi if there is an opportunity for a favorable rate drop down the line. Looking between variable and fixed rate debt on this deal is what sparked my post.

Reply by an investor
from University of Canberra in Perth WA 6000, Australia

^redacted‌ thanks for tagging me on this. The Australian market is a bit different. No SBA Loan regime here so its either bank finance or non-bank lending institutions (private debt suppliers). We've seen both bank and private debt being used here. Banks tend to be offering variable rates, and the privates offering more stable 'fixed' rates (but significantly higher), with a ratchet % based on performance. We have had re-fi opportunities in the past 12 months where the % on offer fromthe bank was lower than 2 years ago (our interest rates have been steadily going up, so this indicated to me that the banks are perhaps getting more competitive here with this kind of financing? Given that the general concesus is that US rates are looking to go down in the next 12 months I'd make sure that if you lock in a rate you have some way of renegotiating the timeframe so you take advantage of any downward trend.

Reply by a lender
from Northwestern University in Chicago, IL, USA

Echoing others, if OP's use of financing is to buy & hold multifamily real estate, then the certainty of a fixed rate is typically prudent to match up against the many years of expected cash flows.

A shorter term use of debt would make variable rate a worthwhile option to consider, assuming you believe rates will be (directionally) sliding down.

Food for thought generally on acquisition loans - Variable option could also unlock dynamic pricing based on company leverage (if lender is willing to offer). I.e. as company grows EBITDA and pays down debt, the loan's pricing spread automatically drops so borrower particpates in the economics of their improving credit profile. Of course, works in opposite direction if company EBITDA craters and/or adds more debt. Though either way the change in spread isn't THAT dramatic.

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