Background noise poses a significant obstacle for auditory perception, especially among individuals with hearing loss. To better understand the physiological basis of this perceptual impediment, the present study evaluated the effects of background noise on the auditory nerve representation of head-related transfer functions (HRTFs). These complex spectral shapes describe the directional filtering effects of the head and torso. When a broadband sound passes through the outer ear en route to the tympanic membrane, the HRTF alters its spectrum in a manner that establishes the perceived location of the sound source. HRTF-shaped noise shares many of the acoustic features of human speech, while communicating biologically relevant localization cues that are generalized across mammalian species. Previous studies have used parametric manipulations of random spectral shapes to elucidate HRTF coding principles at various stages of the cat's auditory system. This study extended that body of work by examining the effects of sound level and background noise on the quality of spectral coding in the auditory nerve. When fibers were classified by their spontaneous rates, the coding properties of the more numerous low-threshold, high-spontaneous rate fibers were found to degrade at high presentation levels and in low signal-to-noise ratios. Because cats are known to maintain accurate directional hearing under these challenging listening conditions, behavioral performance may be disproportionally based on the enhanced dynamic range of the less common high-threshold, low-spontaneous rate fibers.