January 29, 2018
Activity in the government-guaranteed loan sector was centered on fixed-rate DCPC structures and purchases of USDA loans in the secondary market. The limited activity in floating-rate SBAs continued to be centered on trading par handle floating-rate issues. Four months of SBA floating-rate pre-payment activity have passed, giving the market a better understanding of the new cash flow distribution methodology and the market impacts. 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%.
- 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.
Fixed-Rate (DCPC and SBIC) Pools
- Demand for fixed-rate SBA securities picked up last week, with investors adding seasoned DCPCs to their portfolios. The most recent DCPC auction included a 20-year term that was just under $266 million. The pool is comprised of 357 loans, with a fixed coupon of 2.92%, 36 bps over Treasuries. The next auction is scheduled for February 8th.
Government Guaranteed Loan Trading
- Loan trading activity has increased substantially, as depository managers have been returning focus to their government guaranteed loan portfolios. Floating-rate SBA loans are outpacing the origination levels recorded in 2016 and 2017 by both volume and number of loans originated. Fixed-rate loan production has slowed versus previous years, possibly reducing the size of fixed-rate pools in the near-term. In addition, USDA loans continue to be actively traded and have come to market with a variety of structures. Most recent 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 have tailed off since last year. Loan activity has increased across all government guaranteed loan categories, as depository managers refocus their efforts on their loan portfolios. Depositories have been very active purchasing USDA loans for their balance sheets.
Greg Roll, CFA
Senior Vice President