December 11, 2017
Activity in the SBA sector focused squarely on fixed-rate products with the December DCPC auction being met with strong demand. Bank portfolio managers looking for floating-rate exposure have looked to the interest rate swap market to create a “do-it-yourself” SBA floater that offers comparable yields and limited premium risk. Loan activity continues to be strong in both 7(a) floating-rate loans and fixed-rate USDA government guaranteed loans, however activity is expected to lessen as year-end approaches.
Floating-Rate 7(a) Pools
- As investors focus on the widely-expected December rate increase, portfolio managers continued to add variable-rate exposure to their portfolios. Activity focused on the addition of “par” SBA pools, price at levels below 101. “Par” pools offer yields above that of Fed Funds, with limited premium risk. Levels observed last week were pools priced just shy of 101, yielding just north of 1.50%.
- New hedge accounting rules allow banks to combine prepayable assets like a fixed-rate SBA Development Company Participation Certificate (DCPC) with an interest rate swap to create a do-it-yourself floating-rate asset. When properly designed, this transaction qualifies for Fair Value Hedge Accounting treatment. The “do-it-yourself” SBA floater offers comparable yields to SBA floating-rate securities and limited premium risk.
Fixed-Rate (DCPC and SBIC) Pools
- Demand for fixed-rate SBA securities continues to be healthy, as portfolio managers picked up paper from the December DCPC issue. The December DCPC auction only included 20-year maturity. The 20-year term was just over $275 million, the second smallest pool over the past year. The pool is comprised of 367 loans, with a fixed coupon of 2.78%, 45 bps over Treasuries.
Government Guaranteed Loan Trading
- Depositories have been focusing on bringing their government guaranteed loans to the secondary as year-end approaches. Both floating-rate SBA loans and fixed-rate loans have continued to see exceptional growth as the new fiscal year started on October 1st. Through the first 2 months of the SBA’s fiscal year of 2018 both 7(a) and DCPC loans are outpacing last year.
Paper from the latest DCPC auction was picked up by investors looking for fixed-rate exposure in their portfolios. Portfolio managers continue to focus on reviewing their SBA floating-rate holdings and adding fixed-rate government guaranteed exposure to their existing portfolios. Bank portfolio managers looking for floating-rate exposure have looked to the interest rate swap market to create a “do-it-yourself” SBA floater that offers comparable yields and limited premium risk. Please contact your sales representative to inquire about interest rate swap strategies.
Greg Roll, CFA
Senior Vice President