Floating-Rate Debt: A Hidden Risk in Acquisition Growth

Here's a question worth asking before an acquisition-fueled growth story pulls you in: what currency did the deal actually get funded in, and how often does that currency reprice? Cash on the balance sheet is one answer. A fixed-rate bond is another. A floating-rate term loan is a third — and it behaves nothing like the other two once the rate cycle turns.

Most quality screens skip the question entirely. They'll flag revenue growth, maybe a margin trend, maybe a debt-to-EBITDA ratio measured at a single point in time. That's useful as far as it goes. It just doesn't tell you whether the debt behind an acquisition is about to cost twice as much to service eighteen months from now. For a company that just leveraged up to buy growth, that gap is the whole capital-allocation verdict, hiding in a footnote most readers skip.

I want to walk through one acquisition that leaned almost entirely on floating-rate financing, timed about as badly against the rate cycle as a deal can be, and use it as a template for what to check before trusting any acquisition-funded growth number at face value.

The Debt Investors Don't Price Into the Growth Story

Acquisitions get funded three ways, broadly: cash the company already had, stock issued to the seller, or borrowed money. Organic growth funded from a company's own reinvestment is the cleanest case — the return on that capital is visible in the same operating numbers that funded it. Acquisition-fueled growth is murkier, and borrowed acquisition growth is murkier still, because the financing terms sit in a separate part of the filing from the operating results everyone actually reads.

Borrowed money for an acquisition usually comes in one of two forms. Fixed-rate bonds lock in a coupon for years — the company knows its financing cost on day one and it doesn't move. A Term Loan B, the instrument of choice for large leveraged acquisitions, floats: the rate resets quarterly against a benchmark (LIBOR historically, SOFR now) plus a fixed spread. When the benchmark is near zero, a Term Loan B is cheap money and nobody thinks twice about it. When the benchmark climbs three or four percentage points in a year, the same loan balance costs proportionally more to service — with no change whatsoever to the underlying business.

There's a third funding option worth naming too: issuing new equity to pay for the deal, which sidesteps the interest-rate question entirely but raises a different one — permanent dilution, paid whether or not the acquired business ever earns back its purchase price. None of the three funding choices is disqualifying on its own. What's disqualifying is treating them as interchangeable, since a 12% acquisition-fueled growth rate funded by floating-rate debt in a rising-rate world is a meaningfully riskier bet than the same 12% funded by retained cash flow or fixed-rate paper. The market, more often than not, prices all three the same on announcement day.

That distinction almost never shows up in the headline growth number. It shows up in the interest expense line, one section removed from the segment results the market actually rewards a stock for.

Coherent's $2.8 Billion Bet on Rates Staying Put

On July 1, 2022, II-VI Incorporated closed its acquisition of Coherent, Inc. — a laser and photonics maker — in a cash-and-stock deal valued at roughly $7.1 billion in total merger consideration, and took the combined company's name, Coherent Corp. (NASDAQ: COHR), going forward. It's a useful case study of financing choice because the deal size forced the issue: nobody funds a $7 billion acquisition entirely out of cash on hand.

The company entered a $4.0 billion senior secured credit agreement to help fund the deal: an $850 million Term Loan A, a $2.8 billion Term Loan B, and a $350 million revolving facility, all closing alongside the merger. By the end of that December, the Term B facility was pricing at LIBOR — with a 0.50% floor — plus a 2.75% spread, floating by design. Whatever the benchmark rate did next, Coherent's financing cost on nearly $3 billion of debt was going to do the same thing, dollar for dollar, on a quarterly reset.

And what the benchmark did next is not exactly a secret. The deal closed in the middle of the fastest Fed tightening cycle in four decades. A company can be right about the strategic logic of an acquisition — more photonics scale, deeper vertical integration, whatever the deal thesis happens to be — and still get the financing timing badly wrong. Those are two separate judgments, and it's worth keeping them separate when you're reading the story afterward.

Coherent isn't unique in this, either. Term Loan Bs are the default financing tool for large leveraged acquisitions, precisely because they're faster to arrange and easier to size up quickly than a public bond issue. That popularity is exactly why the floating-rate exposure it creates is so common across acquisition-heavy balance sheets — and so rarely discussed outside the credit desks that price the loans.

What Rising Rates Did to the Numbers

Coherent's own disclosures make the mechanism easy to see. Interest expense ran $121 million in fiscal 2022, the year before the Term Loan B was drawn for a full period. In fiscal 2023 — the first full year carrying the new floating-rate debt through a rising-rate environment — interest expense came in at $287 million, up 137% year over year, on a business whose underlying operations hadn't changed nearly that much.

To the company's credit, management didn't treat that as background noise. Coherent paid down $608 million of debt during fiscal 2023, including $267 million in voluntary prepayments against the Term Loan B specifically — prepayments the company said saved roughly $4 million of interest that year and were projected to save about $17 million more in fiscal 2024. In 2024 it went further, repricing the by-then $2.4 billion Term Loan B balance to cut the spread by 25 basis points, worth roughly $9 million a year in savings. None of that undoes the fiscal 2023 spike. So it's worth being precise about what the deleveraging actually bought: a smaller future bill, not a refund on the one already paid.

One thing I don't have full visibility into is how much of that Term Loan B exposure was ever hedged with a swap or a cap — the filings don't spell out complete hedge coverage, and that's a gap worth flagging rather than papering over. What's clear regardless is the direction: floating-rate acquisition debt transmitted a macro rate move directly into the income statement, on roughly a one-quarter lag, with no new strategic decision required on management's part to make it happen.

Reading the Floating-vs-Fixed Split Before You Trust the Growth Number

None of this means debt-funded acquisitions are automatically bad — debt is a normal part of the capital structure for plenty of well-run compounders. It means the floating-versus-fixed split is a specific, checkable fact sitting in the debt footnote, and it belongs in the same read as the growth number itself, not as an afterthought.

• Open the debt footnote or credit agreement exhibit and find the rate basis on each tranche — fixed coupon versus SOFR/LIBOR-plus-spread. A Term Loan B is almost always floating; investment-grade bonds are almost always fixed, and the two carry very different risk profiles even at an identical headline rate.
• Check the interest rate risk disclosure, typically Item 7A of the 10-K, for the company's own sensitivity estimate — most disclose what a 100-basis-point move does to annual interest expense, which turns an abstract risk into a concrete dollar figure.
• Look for hedges. A swap or a rate cap converting floating exposure to a fixed-rate equivalent changes the entire risk picture; its absence, when a company has taken on meaningful floating-rate debt, is itself informative.
• Recompute the deal's return on incremental capital using the current financing cost, not the rate in place at origination. A deal that cleared the hurdle rate at a 5% cost of debt may not clear it at 9%, even though nothing about the acquired business itself has changed.

That last check is the one that actually connects back to return on incremental capital as a quality signal. A deal's strategic logic doesn't change with the rate cycle. Its economics do. And an acquisition financed with floating-rate debt is making an implicit, usually unstated bet on where rates go next, layered on top of whatever bet it's already making on the business itself.

None of this is an argument against acquisitions, or even against Term Loan B financing specifically — plenty of well-run compounders have used both productively over time. It's an argument against taking a growth number at face value before checking what's funding it. The difference between a business compounding on its own cash flow and one compounding on borrowed, repricing money isn't cosmetic. It's the difference between a genuine reinvestment story and a financing story wearing a reinvestment story's clothes.

Key Takeaways

• Floating-rate debt — Term Loan Bs especially — reprices with the benchmark rate every quarter, turning what looks like a one-time financing decision into a variable cost for the life of the loan.
• Coherent Corp.'s interest expense rose 137% from fiscal 2022 ($121 million) to fiscal 2023 ($287 million) after funding roughly $2.8 billion of its Coherent, Inc. acquisition through a floating-rate Term Loan B, right as the Fed's tightening cycle accelerated.
• Aggressive deleveraging and loan repricing can manage the exposure after the fact, but both are a response to a risk that a fixed-rate structure would never have created in the first place.
• Before crediting an acquisition-fueled growth number, check the floating-versus-fixed split in the debt footnote and recompute the deal's returns on that incremental capital at today's financing cost, not the rate in place when the deal was signed.