July 31, 2017
Portfolio managers quickly picked up new issue equipment-backed floating-rate SBA pools last week. In addition, investors continued to focus on adding par handle real-estate-backed floating-rate SBA pools to their portfolios. Fixed-rate SBA investment continues to be limited as the supply of DCPC paper in the secondary market continues to be scarce.
Floating-Rate 7(a) Pools
- New issue equipment-backed SBA floating-rate pools were in high demand last week, as portfolio managers added pools to their existing portfolios. Portfolio managers continue to seek well-structured new issue pools to diversify their current holdings. Well-structured pools are usually considered to be those that consist of loan counts north of 100, with no single loan concentration greater than 5% and homogenous note dates.
- In addition, 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. Current par handle pools trade slightly above par, offering yields just shy of 1.60% at a 10 CPR.
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 and will only include a 20-year term. Last month the 20-year term was just over $305 million, with a fixed coupon of 2.98%, 60 bps over Treasuries.
Guaranteed Loan Trading
- Loan trading activity continues to be robust with YTD government guaranteed loan origination volumes continuing to outpace last year’s totals. Demand for new issue floating-rate pools should continue to support an elevated level of loan trading activity. In particular, 10-year equipment loans continue to be in high demand, as the shorter new issue pools have desirable cash flow structure for many depository investors.
Trading continues to be healthy in par handle SBA floating-rate pools, while investment in fixed-rate SBA is limited 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 when available. Loan trading activity continues to be robust, with YTD government guaranteed loan origination volumes continuing to outpace last year’s totals.
Greg Roll, CFA
Senior Vice President