June 12, 2017
Demand for floating-rate SBAs was steady last week, as investors focus on a likely continued increase in short-term rates. Fixed-rate SBA activity slowed last week, although portfolio managers continue to add 20-year DCPCs to their portfolios in limited quantities. Volume levels of government-guaranteed loans are steady, slightly outpacing last year’s levels.
Floating-Rate 7(a) Pools
- As portfolio managers focus on The Fed’s June meeting this week, activity in floating-rate SBA pools continues to be steady. Depositories have been investing in equipment-backed pools offering shorter cash flow structures than the longer real-estate-backed pools. Equipment-backed pools traded at prices just south of 114, yielding above 1.60% at a 10 CPR.
- In addition to new issue pools, portfolio managers also continue to pick up seasoned pools. 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.
Fixed-Rate (DCPC and SBIC) Pools
- Demand for fixed-rate SBA securities continues to be low, although portfolio managers do continue to pick up limited quantities of recently issued DCPCs in the secondary market. The June auction was met with tepid demand last week. The 20-year term was just under $339 million, with 429 debentures. The fixed coupon was 2.81%, 61 bps over Treasuries.
Government Guaranteed Loan Trading
- Loan origination continues to outpace last year, which should help the formation of new pools later this year. Demand for floating-rate pools continue to support strong pricing levels for the flow of 7(a) SBA loans. 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.
Activity in floating-rate SBAs was steady last week, as investors focus on rising short-term rates and look to diversify SBA holding by origination dates. With attention squarely focused on The Fed and rising short-term rates, demand for fixed-rate SBAs has been limited over the past few weeks..
Greg Roll, CFA
Senior Vice President