May 15, 2017
Demand for floating-rate SBA structures continues to be steady, although new issue supply is limited. For now, demand for 10-year and 20-year structures are being met with secondary offerings of seasoned pools. Fixed-rate SBA demand was satisfied last week with the May auction of 10-year and 20-year DCPC paper.
Floating-Rate 7(a) Pools
- Activity in floating-rate SBAs gravitated towards seasoned pools with limited availability of new issues. Equipment pools trading between 113-115 were in strong demand, offering yields north of 1.60% at a 10 CPR.
- Strong loan demand should lead to the revitalization of new issue pool originations. Currently SBA traders are anticipating new issue floating-rate pools coming to market late next week, both equipment and real-estate-backed pools.
- May prepay speeds for floating-rate pools were recently released with May 2017 YTD averaging 8.4 CPR, slightly higher than last month, and ahead of the 8.1 CPR recorded for 2016. Equipment-backed pools ticked up to 8.1 CPR, as real-estate-backed pools followed suit moving up to 8.5 CPR. Origination years 2013-2015 posted the highest speeds, as pools seasoned 24-48 months typically experience higher levels of prepays.
Fixed-Rate (DCPC and SBIC) Pools
- Demand for fixed-rate SBA securities was met last week with paper from the May DCPC auction. The 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.
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.
Demand for floating-rate SBAs should continue to be satified in the short run by seasoned paper offered in the secondary. The May DCPC auction should continue to be absorbed by portfolio managers wanting to add a fixed-rate component to their portfolios.
Greg Roll, CFA
Senior Vice President