Long Inverse Floating Exempt Receipt LIFER
The Long Inverse Floating Exempt Receipt (LIFER) is a floating rate debt security traded among qualified institutional buyers (QIBs) and created by Deutsche Bank. It pays a yield equal to a fixed base interest rate minus a benchmark rate (such as LIBOR+), meaning that the interest rate paid moves inversely to the direction of the benchmark rate. LIFER owners also receive periodic interest payments that adjust in the opposite direction of the benchmark rate.
Key Takeaways:
– LIFERs are a type of inverse floater created by Deutsche Bank.
– An inverse floater is a debt instrument whose coupon rate moves opposite its benchmark interest rate.
– LIFERs are only available to sophisticated institutional investors.
Understanding Long Inverse Floating Exempt Receipts (LIFERs):
LIFERs fall under municipal structured finance, meaning that the underlying cash flows come from entities like airports, roads, and schools. These securities are exempt from registration with the Securities and Exchange Commission (SEC) under Rule 144A of the Securities Act of 1933. Bearer-bond versions are also allowed for trade in the U.S. under Regulation S.
LIFERs are considered more volatile than vanilla floating-rate notes because the fixed rate of the contract is set higher than the typical range of the benchmark rate. They are traded only among qualified institutional buyers (QIBs) who understand the complexities and risks of the product.
Using an Inverse Floater:
A LIFER is an example of an inverse floater, which moves inversely with interest rates on a variable basis. One might buy an inverse floater if they believe interest rates will decrease in the future at a faster rate than expected. Holding a LIFER could also outperform a regular floating note if rates remain the same over a prolonged period.
Inverse floaters carry a relatively large amount of interest rate risk due to leverage. If near-term interest rates fall, the price and yield of an inverse floater will be magnified. Conversely, if rates rise, an inverse floater will be more profitable. As a result, inverse floaters have higher price volatility.
