November 20, 2017
Investors continued to add fixed-rate SBAs, albeit at a slower pace, to their investment portfolios last week. Activity in the floating-rate SBA sector continues to be limited, although some portfolio managers added new issue “par” pools. In October, the SBA announced a change to the Secondary Market Program relative to the timing of the pass through of amortization excess. Going forward SBA floating-rate prepayment speeds should increase, however not all pools will be impacted equally.
Floating-Rate 7(a) Pools
- Last week portfolio managers added variable-rate exposure to their portfolios ahead of the widely expected December rate increase. Activity focused on the addition of “par” SBA pools, price at levels below 101. “Par” pools offer yield above that of Fed Funds, with limited premium risk. Levels observed last week were pools priced just shy of 101, yielding just north of 1.50%.
- The SBA announced a change to the Secondary Market Program relative to the timing of the pass through of amortization excess. Amortization excess represents undistributed cash flows from loans accumulated within a pool, resulting in a pool balance greater than the total of the collateralizing loan balances. Amortization excess may include differences attributed to principal prepayments on a loan that is less than or equal to 20% of the outstanding principal balance. In the past the SBA paid the excess on the pool’s final payment, going forward they will pay the excess on a pro-rata basis as the pool pays down. Inherently this should impact the prepayment speed of SBA floating-rate pools going forward.
- For more information regarding recent changes to the SBA Secondary Market Program please review our Strategic Insight.
Fixed-Rate (DCPC and SBIC) Pools
- Demand for fixed-rate SBA securities continues to be healthy, as portfolio managers shifted their focus to the latest DCPC issue. The 10-year maturity had a rate of 2.29%, 27 bps over Treasuries. The 20-year term was just over $351 million, the fourth largest pool over the past year. The pool is comprised of 478 loans, with a fixed coupon of 2.79%, 45 bps over Treasuries.
Government Guaranteed Loan Trading
- Depositories have been focusing on bringing their government guaranteed loans to the secondary market as year-end approaches. Both floating-rate SBA loans and fixed-rate USDA loans have been well received. USDA structures can vary, with most maturities between 10 and 20 years. Recently-traded 20-year USDA loans were priced around 103, yielding just north of 3.0% at a 5 PPL, while a loan structured as a 10-year balloon with a 20-year amortization may trade closer to par, yielding around 2.7% at a 5 PPL.
Portfolio managers continue to focus on reviewing their SBA floating-rate holdings and adding fixed-rate government guaranteed exposure to their existing portfolios. Paper from the latest DCPC auction continues to be picked up by investors looking for fixed-rate exposure in their portfolios.
Greg Roll, CFA
Senior Vice President