June 5, 2017
Activity for floating-rate SBAs increased last week, as investors anticipate a continued increase in short-term rates. Fixed-rate SBA activity was steady as portfolio managers continued to add 20-year DCPCs to their portfolios, although demand is lower than the levels experienced earlier this year. Volume levels of government-guaranteed loans continues to be healthy, creating opportunity for new pools later this year.
Floating-Rate 7(a) Pools
- New issue floating-rate pools that came to market recently continue to trade well as investors look to the June Fed meeting for further increases in short rates. Equipment-backed pools traded at prices just south of 114, yielding above 1.60% at a 10 CPR. Equipment-backed pools were met with strong demand from portfolio managers looking to add shorter amortization pools to their SBA allocations.
- Portfolio managers also picked up seasoned pools last week. 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 has recently been soft, although portfolio managers do continue to buy limited quantities of recently issued DCPCs. The May auction included both a 10-year and 20-year term. The 20-year term was just under $362 million, with 481 debentures. The fixed coupon was 2.88%, 49 bps over Treasuries. The June DCPC auction will take place later this week and will only include a 20-year term.
Government Guaranteed Loan Trading
- 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. Loan origination continues to outpace last year, which should help the formation of new pools later this year.
Activity in floating-rate SBAs was very healthy last week, as investors focus on rising short-term rates and look to diversify SBA holding by origination dates. Portfolio managers wanting to add a fixed-rate component to their portfolios will have a chance on Thursday when the June 20-year DCPC prices.
Greg Roll, CFA
Senior Vice President