I am asking a question related to Libor and which rate needs to be used.
For example:
In our company one of our debt instrument uses a 20 year average 6-month LIBOR
In another analysis for the same debt instrument we use 10 year average 6-month LIBOR
Obviously using the second one is preferable as LIBOR rates have been lower on average for last 10 years compared to 20. But is there a general consensus or would the agreement specify for the debt specify which one to use?
Just wanted a feedback from you guys based on your experiences.
So to get this straight… you looking at some debt instrument, and want to know if you should use the 10y or 20y average of 6m Libor, for some analysis? What exactly are you trying to do? Neither method seems particularly great, given regime shifts and the existence of a forward yield curve. However, I can’t tell you without knowing specifically what you are doing…
We are trying to do the impairment analysis for which we need to discount the cash flow using WACC. Obviously a component of WACC is your cost of debt which we are trying to calculate. Cost of debt for this senior debt we are looking at is libor + 2.6%. The confusion lies with what libor is reasonable to use. I will touch base internally tomorrow but just wanted to get some opinion before I am able to get more information within the company.
Given that “libor”, or more accurately, market swap rates, are available to 30 years and further, I would think that you would use that as your base rate, rather than historical interest rates that are largely irrelevant to discounting future cash flows…