April 2, 2018
While a relatively slow trading week for SBAs occurred, the number of investors visiting the sector surpassed what would have been expected given the quarter-end and holiday combination. Floater activity mostly consisted of recently-issued equipment loan pools, augmented by some lower-dollar priced more seasoned pools. Rather sluggish fixed-rate activity included the most recent SBIC issue and very limited activity in DCPCs. Loan trading remained rather brisk relative to bonds.
Floating-Rate 7(a) Pools
- Floater inquiries were more biased toward recently-issued equipment loan pools at the expense of par handle pools.
- The recent 50bp boost to SBA floater yields via a short-term rate increase combined with the one in December more than offsets the negative yield impacts from last fall’s SBA methodology adjustment.
- Inventories of recently-issued equipment loan pools and par-handle floating-rate pools have dwindled. Supply issues seem unlikely due to the recent holiday induced decline in trading volume and the availability of poolable 7(a) loans.
- Most new equipment pool offering prices are in the 113 to 114 price range, with yields over 2.0% at a 12 CPR.
Fixed-Rate (DCPC and SBIC) Pools
- Despite the flat curve, investor aversion to negative convexity remains strong. The ten-year stated final of the SBICs limits extension risk, and prepayment patterns are loosely correlated to interest rates relative to residential mortgages. Some of the recent demand for SBICs has come from investors that already find value in the multifamily sector. Even at a zero CPR, SBICs offered at current levels offer excellent yield spreads over swaps and Treasuries, and prepayment patterns suggest they will have average lives much closer to six years.
- This week the monthly DCPC auction will includes a twenty year term.
Government Guaranteed Loan Trading
- Demand for government guaranteed loans has been quite high for the last several weeks. Of late, limitations on supply have hindered trading volumes.
- The pace of DCPC loan origination remains slow relative to last year, likely limiting the issuances at the upcoming auction.
Investor buying of floating-rate pools, both priced near par and fuller coupon offerings with prices well above par, fell last week, probably more because of the suppressive impacts of the quarter-end than perceptions of value or investor needs. Fixed-rate trading volumes were slow for much the same reasons, and the monthly DCPC auction this week should serve to further elevate investor activity beyond what the return to regular work schedules alone would have.
Director of Investment Product Strategies