April 16, 2018
The SBA sector enjoyed greater than normal investor attention last week. Availability of fixed-rate SBA products from recent auctions and obvious relative value positioning of both SBIC and DCPC offerings resulted in greater than usual trading volumes, while expectations of further short-term rate moves and the overall flattening of yield curves continued to offer compelling reasons to buy floating-rate bonds, including SBA 7(a) pools.
Floating-Rate 7(a) Pools
- March prepayment speeds jumped, reversing the sharp declines from February. Technical factors explain most of both month’s variances from prepayment trends in place since the October procedural changes for 7(a) pool principal payments, though the flatter curve probably pressured speeds higher for some real-estate pools. Please see our SBA Prepayment Commentary.
- The recent and expected path of short-term rates both heavily favor floating-rate products, and SBA pools are one of the few government-guaranteed options without rate caps that offer meaningful spreads over T-Bills and LIBOR.
- SBA floater inquiries and also available supply remained biased toward recently issued equipment loan pools, with prices in the 113 to 114 range and yields well over 2% at expected prepayment speeds.
- Par handle pools continue to attract attention, comparing favorably to a variety of asset-backed floaters of inferior credit quality.
Fixed-Rate (DCPC and SBIC) Pools
- Heavy buying occurred in SBICs and, to a lesser extent, DCPC pools last week.
- Pricing off of the favorable 5.5 to 7.5 year part of the curve afforded obvious yield advantages to investors in recent issues of both SBICs and DCPC pools.
- Flattening yield curves generally favor current cash flow over lockout. Fixed-rate SBA products therefore now compare favorably to many locked-out alternatives, such as agency multifamily products and CMO VADM tranches. As compared to most residential mortgage-backed securitizations, SBIC and DCPC prepayments are less closely correlated to market rates, and thus offer superior convexity profiles versus most residential offerings featuring current principal cash flows.
Government Guaranteed Loan Trading
- Heavy loan flows resumed last week and should continue into the second quarter.
- Demand for government-guaranteed loans remains strong enough that supply represents the primary limit to the volume traded.
- The pace of 7(a) loan origination favors greater pool issuance this business quarter.
Strong weekly volume for the SBA sector reflected favorable relative value positioning for fixed-rate products in terms of both spread and structure. SBA floaters continued to enjoy the enhanced attention resulting from the upward path of short-term rates. Volume should remain strong this week, though last week’s pace will be hard to repeat.
Director of Investment Product Strategies