October 30, 2017
Activity in the SBA sector started out the week with limited trading, only to increase later in the week as new issue floating-rate SBAs came to market. In addition, seasoned fixed-rate paper also traded well ahead of the DCPC auction later next week. Since our last update, the SBA has 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 moderately increase, however not all pools will be impacted equally.
Floating-Rate 7(a) Pools
- Portfolio managers focused on new issue real-estate-backed pools that came to market late last week. Pools traded at prices just north of 112, yielding in the mid 1.60%’s at a 12 CPR.
- The SBA has announced a change to the Secondary Market Program relative to the timing of the pass through of amortization excess. Amortization excess represents that portion of the outstanding principal balance of a pool allocated to a particular pool loan compared to the actual loan principal balance outstanding at the time the loan is prepaid. Amortization excess may include differences attributed to principal prepayments on a pool 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. Significantly, this should impact the prepayment speed of SBA floating-rate pools going forward.
Fixed-Rate (DCPC and SBIC) Pools
- Demand for fixed-rate SBA securities continues to be healthy, as portfolio managers focused on the seasoned DCPC issues. Next 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 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 new issue floating-rate paper and seasoned DCPC. Next week will be the November DCPC auction, which will include 10-year and 20-year maturities.
Greg Roll, CFA
Senior Vice President