March 26, 2018
The SBA sector quieted down last week, as investors digested the prepayment numbers for floaters and boost of supply via the SBIC auction from the week prior. Considering the lack of new inputs, the business pace actually sustained itself surprisingly well, while supplying little in the way of news worthy print.
Floating-Rate 7(a) Pools
- The Fed provided a boost to SBA yields last week and some investors reacted to the more favorable coupons and yields for floaters.
- Floater inquiries were broad based for both par handle and premium priced pools.
- Calendar influences from day count, seasonality, statistical noise, and a reversal of the prior month increase probably influenced the lower CPRs for March more than any changes in trends and patterns, however, the fact of the matter is speeds were slower. Furthermore, another month of history subsequent to the October methodology changes provided a clearer picture and greater comfort level to investors, encouraging ongoing purchases of recently issued pools. Please see our SBA Prepayment Commentary for more information.
- Ongoing demand for par-priced SBA floating-rate pools continued, though their importance in the overall flow is now lower than a few weeks ago due to a rekindling of market interest in the more common premium priced pools.
- Most new equipment pool offering prices are in the 113 to 114 price range, with yields just over 2.10% at a 12 CPR.
Fixed-Rate (DCPC and SBIC) Pools
- Two-way secondary market flow occurred in the recently issued SBIC and also in seasoned DCPCs.
- Demand for SBICs and DCPCs remains strong as they offer superior convexity profiles to most residential MBS alternatives, while offering comparable yields and spreads.
Government Guaranteed Loan Trading
- Supply continues to limit trading volumes for government-guaranteed loans, mostly USDA loans. Recent offerings ranged in term from under 10-years to 20-year terms, with average lives ranging from 4-5 years, priced to yield 3.0% – 3.5%.
- The pace of DCPC loan origination remains slow relative to last year, likely limiting the issuances at the upcoming monthly auctions.
Demand for floating-rate pools, both near par priced and fuller coupon offerings with prices well above par, remained strong, buoyed by the Fed’s rate move and by clearer understanding of new prepayment patterns. Fixed-rate activity dropped versus the prior week as there were no auctions, though a considerable amount of activity occurred in secondary markets. Government-guaranteed loan activity continues to be limited by availability, as demand remains strong.
Director of Investment Product Strategies