May 30, 2017
The holiday-shortened week, coupled with the anticipation of the release of The Fed’s May meeting minutes set the stage for very little activity in trading of SBA securities. Recent activity for floating-rate SBAs has been strong, as investors anticipate a continued increase in short-term rates. Fixed-rate SBA activity has also been steady as portfolio managers look to 20-year DCPC for yield in the government guaranteed sector. 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
- New issue floating-rate pools came to market in recent weeks included both equipment and real-estate-backed pools. Recently issued equipment-backed pools traded at prices just south of 114, yielding above 1.60% at a 10 CPR. The pools were met with strong demand from portfolio managers looking to add shorter amortization pools to their SBA allocations. Recent new issue real-estate-backed pools traded at prices north of 113, yielding just below 1.80% 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 for fixed-rate SBA securities was limited last week, although portfolio managers did continue to trade paper from the May DCPC auction and, in more limited quantity, prior auctions. 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 9.1% ahead of last year and DCPC volume outpacing last year by 14.1%. 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.
Recent new issue floating-rate SBA pools continue to trade, as investors look to diversify origination dates. Portfolio managers wanting to add a fixed-rate component to their portfolios will have a chance next week, June 8th, when the June 20yr DCPC prices. Loan origination are outpacing last year, which should help the formation of new pools later this year.
Greg Roll, CFA
Senior Vice President