July 24, 2017
Activity continued to be centered on par handle floating-rate SBA pools, as investors focus on The Fed meetings later this week. Fixed-rate SBA investment was limited last week as supply of DCPC paper in the secondary market continues to be scarce. Trading of government guaranteed loans was very strong last week, which continues to support the formation of new pools.
Floating-Rate 7(a) Pools
- Investors have been looking to par handle SBA pools to mitigate interest rate risk exposure to rising rates. Par handle SBA pools add asset sensitivity to depository balance sheets without taking on premium risk. Par handle pools trade slightly above par, offering yields just shy of 1.60% at a 10 CPR.
- In addition to activity in par handle real-estate-backed SBA pools, portfolio managers have been adding shorter WAM equipment-backed floating-rate pools. Equipment-backed pools offer shorter cash flow structures than the longer real-estate-backed pools.
- Many portfolio managers continued to seek well-structured new issue pools to diversify their current holdings. Well-structured pools consist of loan counts north of 100, with no single loan concentration greater than 5%, and homogenous note dates. Diversifying pools by origination date can help to mitigate premium exposure to loan prepayments. Prepay speeds for floating-rate SBA pools typically peak at 24 months of seasoning for equipment loan pools and 36 months for real-estate backed pools.
- July prepay speeds for floating-rate pools were recently released with July 2017 YTD averaging 8.6 CPR, on par with last month, and ahead of the 8.1 CPR recorded for 2016. Equipment-backed pools ticked up to 8.6 CPR, as real-estate-backed pools held at 8.6 CPR. Origination years 2013-2014 posted the highest speeds, as pools seasoned 24-48 months typically experience higher levels of pre-pays.
Fixed-Rate (DCPC and SBIC) Pools
- Demand for fixed-rate SBA securities was limited last week although portfolio managers continue to look for DCPC paper trading in the secondary. The next DCPC auction is set for August 10th.
Government Guaranteed Loan Trading
- Loan trading activity picked up last week as YTD government guaranteed loan origination volumes continue to outpace last year’s totals. Trading activity should continue to increase throughout the quarter, as the recent issuance of new floating-rate pools creates heightened demand for new loans.
Trading was elevated in par handle SBA floating-rate pools and limited fixed-rate investments as supply of DCPC may be a challenge until the next auction. Portfolio managers continue to diversify SBA holdings by adding well-structured new issue pools.
Greg Roll, CFA
Senior Vice President