July 16, 2018
SBA activity continues to be focused on floating rate equipment pools offered at par and premium pricing as yields on SBA floating rate pools moved higher last week. Investors are also active in DCPC fixed rates, which are trading at the widest yield spreads in over a year. SBA prepayments were mixed: real estate loan pools slowed, while equipment loan pools experienced faster speeds.
SBA Prepayment Speeds
Mixed prepayment results left overall CPRs for SBA pools above their year-to-date average and also above the average since the October procedural changes. Real-estate pools slowed by a greater amount than equipment loans sped up, and for the first time in several months overall speeds for real-estate pools trailed equipment-loan pools. For additional charts and SBA prepayment commentary, click on the link.
Floating-Rate 7(a) Pools
- Pricing levels on SBA floating-rate pools with uncapped quarterly resets indexed to Prime offer attractive yield opportunities versus interest bearing cash and Fed Funds returns. Yields ranging from approximately 2.30% on par pools and 2.50% or higher on premium pools are currently available.
- Ten-year WAM equipment-loan pools should also attract investor interest due to the cash flows from shorter-amortization schedules. Many equipment-loan pools offer favorable yields and margins using recent market prices and realistically vectored prepayment speeds. Recent offering levels actually result in some of the greatest margins in several months and, when combined with upward moving short term rates, much greater yields.
Fixed-Rate (DCPC and SBIC) Pools
- Fixed rate SBA products, both SBICs and DCPCs, continue to attract considerable attention from traditional buyers of stable CMO structures and also of agency multifamily products. DCPC and SBIC yields and yield spreads versus Treasuries remain at the wide end of their ranges for the last several months.
- The July DCPC auction included both 10yr and 20yr terms and also included a 25yr term.
- The 71bp spread for the twenty-year DCPC auction in July exceeded the yield difference versus Treasuries from every monthly auction result since February 2016. Yield spreads have increased from 35bps in March to 71bps in the July auction.
- Similar to the spread widening in the 20yr auction, the 10yr auction resulted in yields spreads widening to 46bps compared to the 12-month range of 22 to 37bps.
- The July DCPC auction also included a rare 25yr term. The size of the auction was limited to only $27.5 million but offers investors a spread pickup of 14bps over the 20yr term and a 3.68% debenture rate.
Government Guaranteed Loan Trading
- Government-guaranteed USDA agricultural loans and SBA loans traded to financial institutions. As has been the case for some time, supply and not demand limits loan trading volumes.
Dan Stimpson, CPA
Senior Vice President