The price of a commercial loan is expressed as an all-in yield composed of several components: a floating reference rate, a credit spread, and various fees. Understanding each component is essential for comparing loan pricing across deals and assessing the true cost of credit for borrowers.
The floating reference rate is the baseline from which credit is priced. Following the transition away from LIBOR, most U.S. dollar commercial loans now reference the Secured Overnight Financing Rate (SOFR). SOFR is a risk-free rate based on overnight Treasury repo transactions and differs from LIBOR in that it does not carry a bank credit risk premium. Lenders adjusted spreads upward during the transition to account for this difference, often adding a fixed credit spread adjustment (CSA) of around 10–26 basis points depending on the tenor.
The credit spread — sometimes called the margin or all-in spread — reflects the lender's assessment of the borrower's credit risk. Spreads vary widely based on the borrower's leverage, credit quality, industry, collateral, and loan structure. Investment-grade revolvers may price at 75–150 bps over SOFR, while leveraged middle market term loans may carry spreads of 400–600 bps or more.
Fees add to the total cost of credit. Commitment fees (typically 25–50% of the credit spread) are charged on undrawn revolving credit availability. Origination fees — sometimes called upfront or arrangement fees — are paid at closing and may range from 25 to 150+ basis points of the total facility. Annual administration fees compensate the agent bank for managing the credit. Together, fees can materially increase the effective yield, particularly on revolvers that are drawn infrequently.
SOFR floors are another pricing element, particularly in leveraged lending. A SOFR floor sets a minimum rate for the reference rate component — for example, a 0.50% floor means the SOFR component of the spread is treated as at least 0.50% regardless of where spot SOFR trades. Floors protect lenders' yield in low-rate environments and became standard market practice in leveraged loans.