As many know, LIBOR was replaced by SOFR (Secured Overnight Financing Rate) in January of 2022. Since that time, interest rates have steadily increased. More specifically, SOFR has increased 410 basis points from 0.05% to 4.15% from January of ’22 through January of ’23.

The impact of this increase will be considerable, if not catastrophic to many large corporates—especially those that operate on narrow margins. To provide a little more perspective, many large companies have corporate credit facilities, which carry floating rate pricing. It would not be uncommon for a $2B company to have at least a $250M RLOC (Revolving Line of Credit), with >50% of that facility funded on a regular basis. 

in early 2022, the annual interest on that credit facility (assuming a SOFR + 200bp rate) would have been $3,075M. Today, without considering any other changes to the terms, the annual interest expense would be $9,225M; an increase of $6,150M. This represents a 200% increase in the company’s interest expense during a time of significantly compressed margins.   

Without boring you all with more narrative, that same $2B company is likely paying ~$2M / year in merchant processing Discount Fees. Their net annualized net revenue (if partnering with Khor) could be ~$4M, resulting in a positive Delta of ~$6M / year. This completely erases the $6M increase in interest expense referenced above. If ever there were a better “natural hedge” of uncontrollable variable costs, I’m not aware of one.  

John Krusoe, CEO, Khor Capital