If you have looked at a project financing term sheet any time in the last few years, you have almost certainly seen a rate expressed as "SOFR + spread" rather than a single fixed number. That format is not new jargon for its own sake — it reflects a genuine, industry-wide change in how USD-denominated loans are priced, following the retirement of LIBOR. Understanding how the two pieces of that formula work, and which one actually matters most for negotiation, is essential for any project sponsor evaluating financing terms.
A short history: why LIBOR is gone
For decades, the London Interbank Offered Rate (LIBOR) was the dominant benchmark behind trillions of dollars in loans, bonds, and derivatives worldwide, including most USD-denominated project financing. LIBOR was set daily based on a panel of banks submitting estimates of what rate they believed they could borrow from one another — and that reliance on estimates, rather than actual observed transactions, turned out to be a serious structural weakness. A rate-rigging scandal in the early 2010s revealed that panel banks had manipulated their submissions for years, and regulators around the world concluded that a benchmark built on self-reported estimates rather than real transaction data was not fit to anchor the global financial system. Regulators phased LIBOR out over the following decade, and by mid-2023 it had been fully retired for new USD contracts.
SOFR: the benchmark that replaced it
In the United States, the replacement benchmark is SOFR — the Secured Overnight Financing Rate. SOFR is published by the Federal Reserve Bank of New York and is built on a fundamentally different foundation than LIBOR: rather than estimates from a small panel of banks, SOFR is calculated from actual, observed transactions in the overnight U.S. Treasury repurchase ("repo") market — one of the deepest, most liquid funding markets in the world. Because it is based on real transaction volume rather than self-reported guesses, SOFR is much harder to manipulate and much more directly tied to the actual cost of borrowing cash overnight against Treasury collateral.
How SOFR actually moves
SOFR resets daily, based on the prior day's overnight Treasury repo transactions. That means it can move from one business day to the next in response to changes in overnight funding conditions — supply and demand for short-term cash in the repo market, Federal Reserve policy, quarter-end and year-end liquidity pressures, and broader interest-rate conditions. Because SOFR is an overnight rate, lenders that want to price a longer-term loan typically use a compounded average of daily SOFR over the relevant period (commonly referred to as "Term SOFR" or a compounded-in-arrears convention), rather than a single day's reading, to smooth out day-to-day noise.
What "SOFR + spread" actually means
When a term sheet quotes a rate as "SOFR + 250 basis points" (or however the spread is expressed), it means the borrower's all-in interest rate is the prevailing SOFR reading — whatever it happens to be, compounded per the loan's conventions — plus a fixed number of percentage points that the lender adds on top. SOFR represents the lender's baseline cost of funds; the spread represents everything else the lender is pricing in: the credit risk of the specific borrower and deal, the loan's structure and collateral position, the lender's required return, and prevailing competitive conditions in the market for that type of financing.
Why the spread is what borrowers should actually focus on
It is tempting for a borrower to fixate on the base rate, because it is the part of the headline number that changes and gets discussed in the news. But the base rate is not something any individual borrower can negotiate — it is a market-wide figure that applies identically to every SOFR-referenced loan closing that day, regardless of who the borrower is. The spread, by contrast, is entirely deal-specific, and it is the one component a sponsor can actually influence through the strength of its collateral package, the structure of the financing, and how competitively the deal is shopped.
A lower spread, even by a modest amount, compounds meaningfully over the life of a multi-year facility. Two borrowers referencing the same SOFR rate on the same day can end up with materially different total borrowing costs purely because one negotiated a tighter spread — through stronger collateral, a shorter loan term, a more conservative loan-to-value ratio, or simply by bringing multiple competing term sheets to the table.
What drives the spread wider or tighter
- Collateral quality and structure — a facility backed by strong, verifiable credit support (a bank-issued standby letter of credit, for example) typically commands a tighter spread than one relying on weaker or harder-to-value collateral.
- Loan-to-value and leverage — the more conservatively a deal is leveraged relative to the underlying asset's value, the more comfortable a lender generally is pricing a tighter spread.
- Sponsor track record — a sponsor with a demonstrated history of completing similar projects on time and on budget is a lower perceived risk than a first-time developer.
- Deal size and term — very small facilities sometimes carry wider spreads to cover a lender's fixed underwriting cost; very long terms may carry a premium for extended uncertainty.
- Market competition — a deal that multiple lenders are competing to fund will generally price tighter than one with only a single interested party.
A real-world example of SOFR + spread pricing
Limen Capital's own project financing is priced starting at SOFR + 1.5%, as published on Limen Capital's program pages — meaning the all-in rate a sponsor pays is whatever SOFR happens to be on the relevant reset date, plus a spread starting at 1.5 percentage points, with the actual spread for a given deal set by underwriting. That structure illustrates the general pattern described above: the base rate is the market's number, and the spread is the negotiated one.
We are intentionally not quoting a specific current SOFR value in this article, because SOFR resets daily and any number printed here would be stale by the time you read it. If you want to see where SOFR stands today, the Federal Reserve Bank of New York publishes it directly, and it updates every business day.
The bottom line for project sponsors
When you are comparing financing offers, resist the urge to compare only the headline all-in rate on the day you happen to be looking at term sheets — SOFR will be identical across every offer referencing it on that date, so it tells you nothing about which lender is actually offering better terms. Instead, isolate the spread on each offer, and treat that number as the real point of negotiation. A well-structured deal, backed by solid collateral and shopped competitively, is how sponsors actually bring that number down.
This article is general education on how SOFR-referenced financing is priced. It is not a commitment to lend or arrange financing at any specific rate, and nothing here is financial, tax, or legal advice. Actual pricing for any facility is set through underwriting and formal loan documentation.