August 14, 2017
Last week was very active with portfolio managers picking up semi-seasoned floating-rate SBAs and fixed-rate paper from the August DCPC auction. Investors focused on seasoned paper, as new issue premium paper continues to be limited. New issue premium paper should continue to be limited this week, however there are expectations for new issue real-estate-backed pools to hit the market early next week.
Floating-Rate 7(a) Pools
- Investors added semi-seasoned SBA pools, with the focus on real-estate-backed pools originated 1 – 2 years ago. These pools were offered at favorable prices as the pools are approaching the upward ramp in the prepay vector. Prepay speeds for floating-rate SBA pools typically peak at 24 months of seasoning for equipment loan pools and 36 months for real-estate backed pools.
- Premium adverse investors continue to look to par handle SBA pools to mitigate interest rate risk exposure to rising rates. Par handle SBA pools add asset sensitivity to depository balance sheets without taking on premium risk. Current par handle pools trade slightly above par, offering yields just shy of 1.60% at a 10 CPR.
Fixed-Rate (DCPC and SBIC) Pools
- Demand for fixed-rate SBA securities was strong last week, as portfolio managers focused on the August DCPC auction. The August auction only included a 20-year term. The 20-year term was just under $357 million, comprised of 457 loans, with a fixed coupon of 2.75%, 53 bps over Treasuries.
Government Guaranteed Loan Trading
- Demand for new issue floating-rate pools should continue to support an elevated level of loan trading activity. Loan trading activity continues to be robust with YTD government guaranteed loan origination volumes continuing to outpace last year’s totals.
Trading continues to be healthy in semi-seasoned SBA floating-rate pools and in fixed-rate SBA paper, as the August DCPC auction was met with strong demand. Loan trading activity continues to support the creation of floating-rate SBA pools, with the market anticipating new issue pools hitting the market early next week.
Greg Roll, CFA
Senior Vice President