November 6, 2017
Activity in the SBA sector was limited last week, as portfolio managers reviewed current holdings of SBA floating–rate 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. Fixed-rate SBA paper continues to trade well with investors looking to seasoned DCPCs ahead of the November auction later this week. In addition, depositories are looking to the whole loan market, adding USDA government guaranteed loans for fixed-rate exposure.
Floating-Rate 7(a) Pools
- 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 latest Strategic Insight.
Fixed-Rate (DCPC and SBIC) Pools
- Demand for fixed-rate SBA securities continues to be healthy, as portfolio managers have been focusing on the seasoned DCPC issues. This week will be the November DCPC auction, which will include 10-year and 20-year maturities. The October auction only included a 20-year term. The 20-year term was just under $263 million, the smallest pool over the past year. The pool is comprised of 371 loans, with a fixed coupon of 2.85%, 51 bps over Treasuries.
Government Guaranteed Loan Trading
- Loan trading activity continues to be strong as government guaranteed loan volume continues to be robust. Whole loan trading of government guaranteed USDA loans has recently become very active. 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 have been focused on reviewing their SBA floating-rate holdings and adding fixed-rate government guaranteed exposure to their existing portfolios. This week will be the November DCPC auction, which will include 10-year and 20-year maturities.
Greg Roll, CFA
Senior Vice President