Lesson 7 of 25 · 7 min

Reset cadence: the question that decides a rising month

On a climbing path you are charged at the rate your agreement last looked up, not at the rate the market is quoting.

Two facilities priced off the same index with the same spread can charge materially different amounts across the same quarter. The difference is cadence: how often the agreement recomputes the rate.

A reset is a moment of looking. Between resets the rate is frozen at the last observation, so a quarterly facility can spend three months charging a rate the market left behind in week one. The frozen figure is a stale rate, and on a rising path it is a discount the borrower did not negotiate.

Run one quarter both ways. The index prints 4.62, 5.08 and 5.44 percent at the start of three consecutive months of 31, 30 and 31 days, the spread is 1.90 percent, the balance is flat at $920,000, and the basis is Act/360. A quarterly reset locks 6.52 percent for all ninety-two days, giving $15,329.24. A monthly reset charges 6.52, 6.98 and 7.34 percent in turn, giving $5,165.29 plus $5,351.33 plus $5,814.91, or $16,331.53. The gap is $1,002.29 — 6.5 percent of the quarter's interest, produced by nothing but cadence.

On a facility where interest is not paid, that $1,002.29 joins the balance. A larger balance raises the trigger value, and a higher trigger value is less headroom. Cadence is therefore not only a cost line. On a capitalising facility it is a parameter of how close you sit to a maintenance threshold.

One thing cadence is not is a term with a direction. A quarterly reset is a discount in a tightening and a surcharge in an easing, and nothing in the clause tells you which regime is coming. The agreement fixes the lag; the cycle decides what the lag is worth.

Key terms

Reset cadence: How often the agreement recomputes the rate. Daily, monthly, quarterly and semi-annual are all common, and the choice is rarely negotiated.
Stale rate: The frozen figure in force between resets. Accurate on the day it was observed and progressively less so afterwards.
Cadence cost: The difference in interest between two reset frequencies on the same rate path. Positive or negative depending only on the direction of the path.

Worked example

One quarter, two cadences

Index at 4.62%, 5.08% and 5.44% on the first day of three months of 31, 30 and 31 days. Spread 1.90%, balance $920,000, Act/360.

Quarterly reset, 6.52% for 92 days: $15,329.24
Monthly reset, month one at 6.52% for 31 days: $5,165.29
Month two at 6.98% for 30 days: $5,351.33
Month three at 7.34% for 31 days: $5,814.91
Monthly reset total: $16,331.53
Difference: $1,002.29

Same index, same spread, same balance, same ninety-two days. A thousand dollars separated the two facilities because one of them looked at the market twice more than the other.

Check yourself

A facility resets semi-annually. Across six months of 31, 28, 31, 30, 31 and 30 days the index rises in even steps from 4.15 to 5.95 percent. The spread is 2.10 percent and the balance is flat at $1,400,000, Act/360. Roughly what did the semi-annual cadence save against a monthly one?

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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.