For a defined mix of Notional, Term and Strike Rate, the cost of the rate cap will fluctuate over time based upon movements in the “underlying” floating interest rate, e.g. 1-month LIBOR or SOFR. The lower the underlying rate is relative to the Strike Rate the cheaper the cost of the cap and vice-versa.
In fact, how the financial markets expect the underlying interest rate to change in the future also has a big impact on the cap’s cost. If markets expect the underlying rate to increase over the Term of the cap, the greater the likelihood of a payout to the borrower increases, hence the more expensive the cap.
The hidden drivers of cap cost: Interest rate volatility. The more the underlying rate, e.g. 1-month LIBOR, moves around, the greater the likelihood that the underlying rate will spike higher than the Strike Rate. The greater the volatility in interest rates, the more expensive a cap becomes.
Finally, yet another factor that has a big impact on the cost of a cap: The Lender’s rating requirements. Most bridge lenders that require caps of their borrowers also require that the borrower buy the rate cap from a credit worthy financial institution. They manifest this requirement via verbiage in the loan agreement which defines “Initial Ratings” and “Downgrade Triggers”:
In general, the higher the credit rating requirement, e.g. A+ S&P versus A- S&P, the more expensive the cap.
No. While most of the large banks have the capability to sell the borrower a cap, most have limited interest, and thus are not competitive on price. There are only a handful of banks that specialize in caps and make a real business of it, having efficiencies in process and competitiveness in pricing. Further, even fewer of this handful of banks will participate in a bidding auction.
There are several steps involved in getting the ball rolling on the rate cap. While Derivative Logic can routinely orchestrate and help pull the trigger on the cap purchase in as little as 24 hours, we recommend engaging with us at least one week prior to the planned cap purchase or loan close. Pro tip: Don’t put yourself in a position where delays in the cap process also delay the loan close. Get us involved as early as possible.
Planning to purchase a cap requires documentation at several points in the process, specifically:
Lender’s that mandate borrowers buy caps are very familiar with what documentation is needed. Derivative Logic facilitates the generation, circulation and execution of all required documentation as you travel down the road toward your cap purchase and loan close.
Baseball caps are, in many ways, the lazy option for headwear. They’re ubiquitous, they’re cheap and they go with everything. I completely understand those that fight the good fight for brimmed hats, and feel it necessary to attack ball caps in the process.
But a baseball cap can have an elegance to it, even with smarter clothing and tailoring. There are also good ones and bad ones, and people they suit more or less. So it’s likely worth writing some bits on PS - starting today with a personal piece on logos.
A baseball cap worn with fine clothing appeals (of course) because of the contrast. Here's a piece of sportswear being worn with something that is certainly not sportswear. One’s fine and sharp, the other (ideally) worn and battered. It’s a species of high/low dressing - which is always easiest with outerwear and accessories.
Though hasn’t this look been done to death? Haven’t Drake’s and related preppy brands, before them and since, made it trite? This is a question every reader has to answer for themselves, because it’s heavily dependent on their environs, their milieu.
Just keep in mind that you don’t live online. Despite the apparent prevalence of that style, I have yet to see a single person wearing it where I live in my little pocket of south London, and hardly anyone in Mayfair. Beware the perspective-distorting effects of the echo chamber.
There are levels of quality to a baseball cap, but as long as it’s 100% cotton (or leather, or wool - not a synthetic) it’s hard to go wrong. Even the little plastic adjustor on the back has some retro appeal, though personally I prefer cotton or leather.
However, I do think a cap is better with a logo, something personal.
A logo seems to look better to me because of the cap’s sportswear origins, and the fact so many of those have a prominent device. Without it, a baseball cap (not a military cap, or anything of that ilk) feels lacking.
A useful example is the growth of ‘luxury’ caps in recent years, particularly those that became a subject of discussion around the ‘stealth wealth’ of Succession.
To me, those caps, often from Loro Piana, feel rather lifeless. Like they’ve had the character and style sucked out of them. In the same way as cashmere denim, it's the result of someone trying to make a luxury version and removing its essence in the process.
My antipathy towards that type of cap is about the luxury material as well as the lack of logo, but they both feel symptomatic of the same neutered approach.
As to what a logo could be, my answer is anything meaningful.
You wear a band T-shirt to proclaim your passion for that band; you wear a football top to declare your loyalty to the team. I feel like a cap should be similar.
Mine tend to be souvenirs or brands I’m happy to represent. Ralph Lauren, Rubato, a red one from Holiday Boileau that reminds me of a nice day with the team in Paris - and which feels particularly significant given the shop no longer exists, and the whole 16th scene seems to be fading.
My favourite of course is my ‘Cal’ cap, from Berkeley in the US. I didn’t go, but it was a gift from a friend that did, so that feels OK. It still feels authentic.
It shouldn’t be a surprise that given all this, I’m not a big fan of the ironic logo, of a made-up club or team.
Wouldn’t it be cooler to actually wear the name of your local gardening club, where you volunteer on Sundays? Or the local tennis club? Perhaps the issue is people aren't members of such clubs any more.
Last June we took these shots in the Circolo del Tennis in Florence, which is the most wonderful place - old school style, baize tables and newspapers on sticks, kids running around in their white kit on the blazing clay courts.
The following week I was on Chiltern Street in London, and the back half of a shop had been taken over by an imagined tennis club, the Rochambeau. The idea was to promote a particular rosé wine - Racquet - that otherwise didn’t have a back story like other French wines.
It was all very clever, very well done - but it was really just another type of hype. After Florence, it felt a little hollow.
The one cap I have without a logo is from RRL which seems different because the rough-out suede is so rugged: it’s a whole outer layer on its own. Waxed caps feel similar.
Other exceptions include recreations of military caps that would never have had something on them, and of course actual vintage models.
Thinking about it, what I really want to push against is the prevalence of plain caps worn as just another piece of practical headwear, like a beanie (below). And perhaps the artificial distressed ones, which look so artificial. Just wear them and if you absolutely need to, sticking them in the washing machine a couple of times.
As with many rants, I’ve started with a feeling and rationalised my way through it. It’s cathartic. Hopefully some useful points rubbed off along the way.