May 1, 2017
The SBA sector continues to see strong demand for floating-rate structures in both equipment and real-estate-backed pools. The majority of activity was in new issue floating-rate pools. Investments in fixed-rate SBA securities was limited, as inventory levels are sparse and portfolio managers wait for the May DCPC auction next week. Loan trading activity was very high last week, as pool structurers compete for the limited supply of government guaranteed loans.
Floating-Rate 7(a) Pools
- Demand for SBA floating-rate pools was very strong last week with investors looking to an array of floating-rate structures. Some of the recently issued real-estate-backed pools were priced just below 113, yielding above 1.80% at a 10 CPR, while pools with higher coupons traded just below 117 and yielded north of 2.00% at a 10 CPR. Portfolio managers are not only adding new issue pools for the variable nature of the coupons, but also to diversify their current holdings. 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.
- April prepay speeds for floating-rate pools were recently released with April 2017 YTD averaging 8.1 CPR, slightly higher than last month, and on par with the 8.1 CPR recorded for 2016. Equipment-backed pools ticked up to 7.7 CPR, as real-estate-backed pools followed suit moving up to 8.2 CPR. Origination years 2013-2015 posted the highest speeds, as pools seasoned 24-48 months typically experience higher levels of pre-pays.
Fixed-Rate (DCPC and SBIC) Pools
- Investments in fixed-rate SBA securities was limited last week, as inventory levels are low. As portfolio managers wait for the May DCPC auction they look to seasoned product in the secondary market and any available pieces of the April DCPC auction. The April auction produced a 2.84% coupon, 51bp over swaps.
Government Guaranteed Loan Trading
- Loan trading activity was very healthy last week, as demand for government guaranteed loans is strong. Loan purchasers are competing for a limited number of loans which has led to strong bids for loans. Demand for floating-rate pools should continue to support loan pricing levels for the foreseeable future.
Loan trading activity continues to increase, as loan originations try to keep pace with the demand from pool structurers. Floating-rate SBAs continues to experience heightened activity, with the focus on both equipment and real-estate-backed pools.
Greg Roll, CFA
Senior Vice President