January 22, 2018
Activity continued to be limited in the SBA market, as investors chipped away at floating-rate and fixed-rate SBAs being held in inventories. The limited activity was centered on trading par handle floating-rate issues and the latest issue DCPC. Loan trading activity has increased substantially, as depository managers have been returning focus to their government guaranteed loan portfolios.
Floating-Rate 7(a) Pools
- 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%.
- The FOMC voted for the third time in 2017 to hike its overnight target rate range, this time to 1.25-1.50%. The hike was largely expected by the markets. Coupons on floating-rate SBAs increased by 25 bps on January 1, 2018.
Fixed-Rate (DCPC and SBIC) Pools
- Demand for fixed-rate SBA securities continues to be healthy, albeit tempered recently, as the most recent DCPC auction was held a little over a week ago. The January DCPC auction included a 10-year and 20-year maturity. The 10-year term was a $12.6 million pool, with a 2.55% coupon. The 20-year term was just under $266 million, the second smallest pool over the past year. The pool is comprised of 357 loans, with a fixed coupon of 2.92%, 36 bps over Treasuries.
Government Guaranteed Loan Trading
- Loan trading activity has increased substantially, as depository managers have been returning focus to their government guaranteed loan portfolios. Both floating-rate SBA loans and fixed-rate loans have continued to see exceptional growth as the new fiscal year started on October 1st. The volume of SBA loans out for the bid was strong last week, which should lead to the creation of new SBA pools in the near future. In addition, FSA loans have come to market offering yields north of 3.0% at a 5 PPL, on average 70 bps over the UST curve. Current FSA loans coming to market are typically amortizing, 10- to 15-year term loans, with average lives around 4 ½ years.
Portfolio managers continue to focus on future rate increases and look to mitigate interest rate risk exposure by adding variable-rate investments to their portfolios. Demand for fixed-rate SBA securities continues to be healthy, although last week we noticed a pullback in activity. Loan activity has increased across all government guaranteed loan categories, as depository managers refocus their efforts on their loan portfolios.
Greg Roll, CFA
Senior Vice President