# Modeling floating rate debt in DCF model

If I’m modeling an LBO, or any DCF model for that matter, what is the best practice for dealing with floating rate debt? Just use the treasury forward curve and keep the credit spread constant? Perform sensitivity analysis and hope for the best? Obviously a big slice of floating rate debt could have a big effect on my interest coverage at the margin and adds more uncertainty to the debt capacity question. Most excel models I’ve seen have simply contained a constant interest rate. Also, what are the best resources for estimating prepayment penalties and learning about covenants on a public company’s debt? I’m assuming there may be a debt screener in Bloomberg that gets beyond what is disclosed in the 10-K…

Some disclose the credit agreement, some do not. Your best bet is to pull up the loans screen (Ticker L CORP ) You can go through the loans 1 by 1 if its a small company. Or you can run a screen in excel (Export the loan list to excel and use your BBG plug in to find out if there is covenant/default information available). If it is, then you can pull up only those ones (I don’t believe prepayment penalties themselves can be mined into excel)

For the FRN modeling: for the Treas curve: May depend on whether you subscribe to the expectations hypothesis of the yield curve. If you don’t (and most don’t) a reasonable alternative is to assume the curve will maintain its current shape going forward, so assuming today’s curve in perpetuity lets you price the note arbitrarily far into the future. If you’re an expectations-hypothesis person, impute the forward rates from today’s curve, allowing you to construct the expected curve at any point in the future. More robust techniques would include Monte Carlo simulation of rates. Adding stochastic credit spreads is a similar improvement. I’ve seen all these techniques used; but as you say the first one (frozen everything) is the most popular, and unless you want to get quantitative when you use the term “uncertainty”, it’s reasonably expedient.

Do you have a cap? If so be conservative and use the cap rate…