May 21, 2018
Floater activity picked up last week, with increased investor activity in par handle pools and also in shorter-amortization equipment-loan pools. Fixed-rate activity slowed, mostly because the prior week featured a dual DCPC auction and no new paper priced last week. The overall bond market sell-off did incite some fixed-rate interest mid-week, and fixed-rate SBA spreads remain at the wide end of their six-month range.
Floating-Rate 7(a) Pools
- Par handle pools continue to get the most attention in the sector, and not just among typical SBA buyers. Historical buyers of other floaters continue to explore the SBA market, representing a meaningful amount of recent inquires. In addition to competitive yields with no rate adjustment caps and a government guarantee, some investors cite the cash flows as important features, with few uncapped amortizing alternatives available.
- The May prepayment slowdown versus April put speeds back in line with their average since October, and the consistency of trends seemed to stir interest in equipment loan pools. Newly issued pools run at speeds based on trends and also based on a historical vector using six-month speeds compare favorably to other floating-rate products.
- New issue equipment-loan pools competed with par handle pools in terms of trades and inquiries last week. The cash flows from shorter amortization schedules and more consistent recent prepayment speeds were cited as reasons.
- The likelihood of short-term rate hikes later this quarter and also further into this cycle continues to spark interest in floaters in general and SBAs in particular, including some investors that typically hold minimal floating-rate products.
Fixed-Rate (DCPC and SBIC) Pools
- DCPC yield spreads versus Treasuries remained at levels consistent with the recent auction, at the wide end of the range for the last several months.
- SBIC spreads also remain at the wide end of recent history, though they received less interest in the secondary market last week. At current spreads, SBIC yields exceed yields for most any other US government-guaranteed product having a ten-year stated final.
Government Guaranteed Loan Trading
- Supply remains the limiting factor, with loans that surfaced last week meeting enthusiastic response from buyers. Agricultural collateral, often poultry loans, continues to be the theme.
- Strong 7(a) loan origination continues to outpace pool issuance.
SBA floaters enjoyed increased investor interest last week. Par handle pools and equipment loan pools shared the limelight, with real estate pools mostly maintaining wallflower status. Despite favorable spreads, fixed rate SBAs only received modest investor attention last week.
Director of Investment Product Strategies