November 27, 2017
Activity was limited last week due to the Thanksgiving holiday. Some investors picked up fixed-rate SBAs and par priced floating-rate SBAs early in the week. Loan activity continues to be strong in both 7(a) floating-rate loans and fixed-rate USDA government guaranteed loans.
Floating-Rate 7(a) Pools
- Portfolio managers continue to add 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 yields 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%.
Fixed-Rate (DCPC and SBIC) Pools
- Demand for fixed-rate SBA securities continues to be healthy, as portfolio managers continue to focus on the latest DCPC issue. The November DCPC auction, which included 10-year and 20-year maturities. 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 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 auctions continues to be picked up by investors looking for fixed-rate exposure in their portfolios.
Greg Roll, CFA
Senior Vice President