RR Insights Journal Feb 2022

Feb 15, 2022 | Insights

Considering the Risks of New Franchise Finance Lending Index 

  • Effective 1/1/22, LIBOR was replaced by the Secured Overnight Financing Rate (SOFR) which represents the cost of borrowing cash collateralized by Treasury securities in the repo market.
  • As ~60% of 2021 franchise finance loan origination was floating (according to RR’s recent Restaurant Finance & Valuations report), the new SOFR index could represent a systemic risk given the history of repo market volatility with intra-day rates spiking to 10% on 9/17/19 after previous troubles at the end of 2018.

  • While the Fed was able to stabilize the spike in the rate, it does highlight the risk of financing long-term assets with market based short-term rates that can fluctuate dramatically. Given this shift in lending indexes, it may be prudent for franchisees to fix their floating rate loans to hedge this risk.

Contact Us for Subscription Info

No Bull Economics
Restaurant Research

Email Sign-up

Current Newsletter

Digital Marketing Opportunities

Recent Posts

Restaurant Research

A Restaurant Research LLC Company