Long Inverse Floating Exempt Receipt (LIFER)

What Is a Long Inverse Floating Exempt Receipt (LIFER)?

A Long Inverse Floating Debt Receipt (LIFER) is a floating rate debt security traded among qualified institutional buyers (QIBs) and originally created by the German bank Deutsche Bank.

A long inverse floating debt receipt pays a yield equal to a fixed base interest rate minus the floating rate of a benchmark (such as LIBOR+). As such, the interest rate paid moves inversely to the direction of the variable rate itself. Owners of a LIFER also receive periodic interest payments, which will adjust in the opposite direction of the benchmark rate.

Understanding Long Inverse Floating Exempt Receipts (LIFERs)

Long Inverse Floating Debt Receipts (LIFERs) often fall under municipal structured finance. This means that the underlying cash flows for the receipts are provided by municipal authorities, such as airports, roads, and schools. These securities are generally exempt from registration with the Securities and Exchange Commission (SEC) under a provision in the Securities Act of 1933 known as Rule 144A. Bearer-bond versions (that offer no coupon) are also allowed for trade in the U.S. under Regulation S.

LIFERs are considered more volatile than vanilla floating-rate notes, as the fixed rate of the contract will be set higher than the typical ranges of the (variable) benchmark, and often by a larger margin than the benchmark is from zero. Their complexity and increased risks are why they are only traded among qualified institutional buyers (QIBs) on the assumption of there being a sophisticated investor who understands the nuances and the risks of the product.

Using an Inverse Floater

A LIFER is an example of a broader category of financial contract known as an inverse (reverse) floater. As the name suggests, its value moves inversely with interest rates on a variable or adjustable basis.

Somebody might wish to purchase an inverse floater if they believe that interest rates will decrease in the future, and at a faster rate than expected. Another way to use an inverse floater is if one expects rates to remain the same over a prolonged period, holding a product such as a LIFER would typically outperform the regular (non-inverse) version of the floating note.

Because inverse floaters utilize leverage, they can carry a relatively large amount of interest rate risk. If near-term interest rates fall, the drop in price on an inverse floater, along with its yield, will be magnified as a result. By the same token, if rates rise an inverse floater will be more profitable than unleveraged rates instruments. As a result, an inverse floater carries a higher degree of price volatility.