October 16, 2017
Last week began with limited activity in the SBA sector only to finish the week strong, as portfolio managers picked up floating-rate SBAs and fixed-rate paper from the latest DCPC auction. Floating-rate additions were both seasoned equipment-backed pools and seasoned real-estate pools.
Floating-Rate 7(a) Pools
- Portfolio managers looked to seasoned real-estate-backed pools offering more yield than the shorter equipment-backed SBA pools. Pools traded had 12-36 months of seasoning and traded at prices 116-118, yielding north of 2.10% at a 10 CPR.
- Equipment-backed pools typically have a lower WAM and offer a shorter cash flow profile than real-estate-backed pools. Last week seasoned equipment-backed pools recently traded at prices 111-113, yielding from 1.75% to just north of 1.90% 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 continued to be healthy, 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 strong as government guaranteed loan volume outpaced last year’s levels for both the 7(a) and DCPC programs. The 7(a) saw more than $25 billion originated in fiscal year 2017, while DCPC originations totaled more than $5 billion. Demand for new issue floating-rate pools should continue to support an elevated level of loan trading activity.
Portfolio managers continue to add both floating-rate and fixed-rate SBA paper to their existing portfolios. Recently, managers have looked to seasoned paper, tailoring their purchases to the cash flows needs of their portfolio.
Greg Roll, CFA
Senior Vice President