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.
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