October 10, 2017
The trend of the previous weeks continue, as portfolio managers add seasoned floating-rate SBAs and new fixed-rate paper. Floating-rate additions were both seasoned equipment-backed pools and seasoned real-estate pools. As the supply of the semi-annual SBIC issuance disappeared, investors looked to pick-up DCPC paper from the October auction for their fixed-rate SBA needs.
Floating-Rate 7(a) Pools
- Seasoned equipment-backed pools recently traded at prices 111-113, yielding from 1.75% to just north of 1.90% at a 10 CPR. Typically these pools have a lower WAM and offer a shorter cash flow profile than real-estate-backed pools.
- Investors also added seasoned real-estate-backed pools offering more yield that the shorter WAM pools. Recently traded real-estate-backed pools traded at prices 116-118, yielding north of 2.10% at a 10 CPR.
- Adding seasoned pools to a portfolio can also help to mitigate premium risk, as portfolio managers look to diversify holdings based on origination dates.
Fixed-Rate (DCPC and SBIC) Pools
- Demand for fixed-rate SBA securities continues to be strong, as portfolio managers focused on the October DCPC auction. 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 slow as depositories continue to focus on closing the books on the 3rd Trading activity should resume to previous levels after depositories finish their quarter-end administrative duties. Demand for new issue floating-rate pools should continue to support an elevated level of loan trading activity.
Investors continue to focus on adding fixed-rate paper to their portfolios, with the DCPC from the October auction trading well. Also, portfolio manager are adding available seasoned floating-rate SBAs, both equipment and real-estate-backed pools.
Greg Roll, CFA
Senior Vice President