June 19, 2017
Floating-rate SBAs benefited from the Prime rate increase last week, with activity somewhat limited by supply. Fixed-rate SBA activity remained slow, with two weeks until the next DCPC auction and limited sellers in the secondary market. Strong levels of government-guaranteed loans changed hands, with supply thus far outpacing last year’s levels.
Floating-Rate 7(a) Pools
- The widely expected Fed Fund’s target rate increase prompted a near immediate increase in the Prime Rate. As the curve flattens, yield differences between SBAs floaters and fixed-rate alternatives continue to shrink; based on recent prepayment speeds and on reasonable expectations, many recent offerings of floating-rate SBA pools out-yield three-year Treasuries.
- Pool factors for June showed overall prepayment speeds increased slightly, with a 0.2 overall CPR increase for 7(a) pools.
- With the recent lull in issuance, portfolio managers also continue to focus on 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
- The lack of activity in fixed-rate pools is hardly surprising with the DCPC auction still two weeks away and with the recent trend toward small price swings. For what few trades occurred recently, yield spreads compared very favorably, with other many other products having much inferior convexity.
Government Guaranteed Loan Trading
- Originators continued to sell production, with originations continuing to outpace last year. Demand for floating-rate pools continues 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.
While supply and the calendar, SBA activity was steady last week and demand remains strong. This is especially true for floating-rate SBA pools, and although rising short-term rates favor all floating-rate products, the uncapped aspect of the SBA floaters provides a prominent advantage over many floating-rate alternatives. The prospect of further potential short-term rate increases and the already strong demand for the product suggest favorable market response to pool issuances when they recur.
Director of Investment Product Strategies