SBA Update

December 17, 2018

Investors remain active in floating-rate SBA pools as yields on these pools should move higher if the Fed raises rates as expected this week, which should continue to drive demand in floating-rate SBAs.  Prepayment speeds for SBA 7(a) pools declined in December compared to the previous month and printed slower speeds than their respective 12-month moving averages.

December SBA Prepayment Speeds

Equipment and Real-Estate SBA 7(a) pools posted 24% and 25% declines, respectively, in their 1mo CPRs measured month-over-month.  Every vintage of consequence for equipment pools posted a month-over-month decline, save the 2017 issue pools, which increased 12%.  Real-Estate speeds by vintage were more uniform. Every vintage of consequence posted a month-over-month decline.

Floating-Rate 7(a) Pools

• Investors have remained active in floating rate equipment pools offered at par and also those with premium pricing. Ten-year WAM equipment-loan pools should attract investor interest due to the cash flows from shorter-amortization schedules: many competing floating rate alternatives offer minimal or no principal cash flows for a significant interval after issuance.
• Pricing levels on SBA floating pools with uncapped quarterly resets indexed to Prime offer attractive yield opportunities versus interest bearing cash and fed funds returns and also when compared to other floating rate bond alternatives.
• Yields ranging from approximately 2.72% on discount priced pools and 3.00% on premium priced pools are currently available. With 90-day Treasuries trading at 2.41%, this represents an opportunity to buy discount priced SBA floater pools at a spread of 31bp over 90-day Treasuries and yields equal to 2-year Treasuries.
• The market is currently pricing in around a 75% chance of another 25bps hike by the Fed at their meeting on December 19th and 12 of 16 Fed members are projecting another hike this year, which should continue to drive demand in floating-rate SBAs.
• With another 25bps hike in fed funds, discount priced floating rate SBA pools would yield approximately 2.97% and premium priced pools would yield approximately 3.25% using the current prepayment vector, combined with the floating rate benefits of lower price volatility and effective duration.

Fixed-Rate DCPC Pools

• The December DCPC auction last week included 20yr and 25yr terms.
• Fixed-rate DCPC pools and SBIC fixed-rate debentures remain attractive as they offer superior convexity profiles to most residential MBS alternatives, while offering comparable yields and spreads.
• Yield spreads versus Treasuries widened in the December auction compared to the prior month and are wider than the average for the prior 12 months in all maturity terms.
• The 70bp spread over Treasuries for the 20yr DCPC auction in December widened 5bps from the prior month, while the 25yr term also widened 5bps to 83bps.
• Pool issuance in the December auction increased overall compared to the previous auction. Issuance for the 20yr term declined to $244.2M, while the 25yr term increased to $80.8M.

Government Guaranteed Loan Trading

Government-guaranteed USDA agricultural loans and SBA loans actively traded to financial institutions last week.  As has been the case for some time, supply and not demand limits loan trading volumes.

Dan Stimpson, CPA

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP