May 22, 2017
Activity for floating-rate SBAs was strong last week, as multiple new issue pools hit the market. Fixed-rate SBA activity was steady as the overall market rallied and investors picked up DCPC paper from the May auction held the previous week. The volume of government guaranteed loans continues to outpace last year which should foster new issuance later in the year.
Floating-Rate 7(a) Pools
- The new issue floating-rate pools that came to market late next week included both equipment and real-estate-backed pools. The pools were met with strong demand from portfolio managers looking to add to their SBA allocations. The new issue real-estate-backed pools traded at prices north of 113, yielding just below 1.80% at a 10 CPR. Recently issued equipment-backed pools traded at prices just south of 114, yielding above 1.60% 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.
Fixed-Rate (DCPC and SBIC) Pools
- Demand continues for fixed-rate SBA securities, as portfolio managers add 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
- Loan originations continue to be strong, with 7(a) volume 9.7% ahead of last year and DCPC volume outpacing last year by 13.8%. 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.
New issue floating-rate SBA pools continue to trade well in the market, as investors look to diversify origination dates. The May DCPC auction augmented supply for portfolio managers wanting to add a fixed-rate government-guaranteed component to their portfolios. Loan origination are outpacing last year, which should help the formation of new pools later this year.
Greg Roll, CFA
Senior Vice President