February 5, 2018
Activity in the SBA and related markets continues to be squarely centered on fixed-rate DCPC structures and purchases of USDA loans on the secondary market. Although floating-rate SBAs continue to trade, the majority activity is in par handle floating-rate issues. Four months of SBA floating-rate prepayment activity have passed, giving the market a better understanding of the new cash flow distribution methodology and the market impacts.
Floating-Rate 7(a) Pools
- Four prepayment cycles have passed since the SBA announced and their master servicer Colson implemented important changes to procedures for distributing cash flows from 7(a) loans to pools. These cash flow changes resulted in an upward shift in pool CPRs. The timely payment of all principal and interest, the rate reset mechanism, and all the features of the product remain the same. While the SBA created a need to adjust prepayment assumptions, the sector retains the key characteristics that made and should continue to make SBA floaters a highly desirable defensive asset. For further information regarding recent prepayment metrics regarding floating-rate SBAs, please review our latest Strategic Insight.
- SBA floating-rate securities continue to be a strong alternative to mitigate interest rate risk in a rising rate environment. Recent activity has 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 1.75%.
Fixed-Rate (DCPC and SBIC) Pools
- Demand for fixed-rate SBA securities continues to be healthy, with investors adding seasoned DCPCs to their portfolios last week. Last month the DCPC auction included a 20-year term that was just under $266 million. The pool was is comprised of 357 loans, with a fixed coupon of 2.92%, 36 bps over Treasuries. The February auction will only include a 20-year term and is scheduled for Thursday of this week.
Government Guaranteed Loan Trading
- Loan trading activity has been strong the past couple of weeks, as depository managers have been returning focus to their government guaranteed loan portfolios. Healthy loan trading activity should lead to the creation of new SBA pools in the near future. In addition, USDA loans continue to be actively traded and have come to market with a variety of structures. Most recently, loans available have ranged between 5-10 years, offering yields between 2.0% and 3.0%.
Demand for fixed-rate SBA securities continues to be healthy, although fixed-rate loan originations that back DCPC debentures has tailed off since last year. Strong demand should continue if supply is limited due to lower fixed-rate origination activity. In addition to DCPCs, depositories have been very active purchasing USDA loans for their balance sheets.
Greg Roll, CFA
Senior Vice President