August 21, 2017
Last week activity was limited to floating-rate and fixed-rate SBAs trading in the secondary. Investors picked up seasoned floating-rate paper, as new issue premium paper continues to be limited. New issue premium paper should become available this week, as there are expectations for new issue real-estate-backed pools to hit the market early in the week.
Floating-Rate 7(a) Pools
- After three weeks of limited supply of premium floating-rate SBA paper, multiple real-estate-backed pools are expected to come to market early this week. Portfolio managers continue to seek well-structured new issue pools to diversify their current holdings. Well-structured pools consist of high loan counts, with no single loan concentration greater than 5%, and homogenous note dates. Diversifying pools by origination date can help to mitigate premium exposure to loan prepayments. 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.
- August prepay speeds for floating-rate pools were recently released with August 2017 YTD averaging 8.7 CPR, slightly higher than last month, and ahead of the 8.1 CPR recorded for 2016. Equipment-backed pools drove the increase recording a YTD speed of 9.0 CPR, as real-estate-backed pools slowed slightly to 8.5 CPR. Origination years 2013-2014 posted the highest speeds, as pools seasoned 24-48 months typically experience higher levels of pre-pays.
Fixed-Rate (DCPC and SBIC) Pools
- Demand for fixed-rate SBA securities was limited last week, as investors were only able to pick up odd-lot pieces traded in the secondary. Supply may continue to be limited as the September auction is over two weeks away. The September auction will include a 10-year and a 20-year term. Last month 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
- Last week was very active with depositories actively trading out of their government guaranteed loan portfolios. In addition to trading SBA floating-rate loans, depositories traded USDA fixed-rate loans. Loan trading activity continues to be robust with YTD government guaranteed loan origination volumes continuing to outpace last year’s totals.
Demand continues to be healthy for SBA floating-rate pools, with low levels of supply limiting activity last week. New issue premium paper should become available this week, as there are expectations for new issue real-estate-backed pools to hit the market early in the week.
Greg Roll, CFA
Senior Vice President