December 4, 2017
Activity increased last week with investors adding near-par SBA floating-rate pools to their portfolios. In addition, some investors added fixed-rate exposure by picking up DCPCs from recent auctions. 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
- Portfolio managers continue to add variable-rate exposure to their portfolios ahead of the widely-expected December rate increase. Activity focused on the addition of “par” SBA pools, priced 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 continue to focus on the latest DCPC issue. The November DCPC auction included 10-year and 20-year maturities. The 10-year maturity had a rate of 2.29%, 27 bps over Treasuries. The 20-year term was just over $351 million, the fourth largest pool over the past year. The pool is comprised of 478 loans, with a fixed coupon of 2.79%, 45 bps over Treasuries.
- The December DCPC auction on Thursday will feature a 20-year maturity only.
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 USDA loans have been well received. USDA structures can vary, with most maturities between 10 and 20 years. Recently-traded 20-year USDA loans were priced around 103, yielding just north of 3.0% at a 5 PPL, while a loan structured as a 10-year balloon with a 20-year amortization may trade closer to par, yielding around 2.7% at a 5 PPL.
Portfolio managers continue to focus on reviewing their SBA floating-rate holdings and adding fixed-rate government guaranteed exposure to their existing portfolios. Paper from the latest DCPC auctions continues to be picked up by investors looking for fixed-rate exposure in their 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