Rate Floors In Commercial Loan Agreements

Over the past few years, rate floors have become standard in commercial loan agreements. Following the 2008 financial crisis, lending rates dropped significantly and a sustained period of low interest rates has followed. There have even been instances of interest rates for certain currencies becoming negative. To protect against negative interest rates, the lending market has adopted rate floors, particularly with respect to LIBOR rates. The purpose of rate floors is to give lenders a guaranteed return on their loans even in the event that rates become negative. In Canada, this development has resulted in floors on LIBOR and CDOR (Canadian Dollar Offered Rate) rates.

What drives negative interest rates? It is well known that cash hoarding can occur in connection with preparations for an insolvency filing. Cash hoarding can also occur with solvent businesses and individuals during periods of economic uncertainty and deflationary times. Rather than investing funds in