September 24, 2018
SBA activity last week continued in fixed rate SBIC and DCPCs, while investors may shift their focus to floating rate SBA pools this week given the Fed meeting mid-week and the expected 25bps rate hike.
Floating-Rate 7(a) Pools
- Investors have remained active in floating rate equipment pools offered at par and also those with premium pricing. Ten-year WAM equipment-loan pools should attract investor interest due to the cash flows from shorter-amortization schedules: many competing floating rate alternatives offer minimal or no principal cash flows for a significant interval after issuance.
- Pricing levels on SBA floating pools with uncapped quarterly resets indexed to Prime offer attractive yield opportunities versus interest bearing cash and fed funds returns and also when compared to other floating rate bond alternatives. Yields ranging from approximately 2.40% on par pools and 2.55% or higher on premium pools are currently available. With 90 day Treasuries trading at 2.18%, this represents an opportunity to buy current pay bonds with a par handle on the price at a spread over 20bp based on the 90 day reset.
- The fed funds futures market is currently pricing in a 100% chance of a 25bps hike by the Fed on September 26th and is pricing in around a 75% chance of an additional hike in December. With a 25bps hike in fed funds, floating rate SBA equipment pools would yield approximately 2.80% using the current prepayment vector, a comparable yield to a 2-year Treasury bond (2.82% yield) combined with the floating rate benefits of lower price volatility and effective duration.
Fixed-Rate SBIC Debentures
- The SBIC debenture rate is set based off of a market-driven premium to 10-year Treasury Notes.
- The semi-annual SBIC auction priced last Thursday at a spread of 55bps over 10-year Treasury Notes.
- SBIC spreads widened versus the March auction and the 48bp average spread.
- Issuance totaled $923M; down slightly from the prior auction and the 6-year average.
- Demand for SBICs remains strong as they offer superior convexity profiles to most residential MBS alternatives, while offering comparable yields and spreads.
Fixed-Rate DCPC Pools
- The September DCPC auction included 10yr, 20yr and 25yr terms.
- Yield spreads versus Treasuries remain at the wide end of their ranges for the last several auctions.
- The 64bp spread over Treasuries for the twenty-year DCPC auction in September was unchanged from the prior month, while the twenty five-year term tightened a basis point to 76bps.
- The ten-year DCPC auction priced at a spread of 38bps, 6bps tighter than the July auction.
- Pool issuance in the September auction for the 10yr and 25yr terms increased over the previous auction, while 20yr pool issuance declined $65.4M to $278.9M.
Government Guaranteed Loan Trading
Government-guaranteed USDA agricultural loans and SBA loans actively traded to financial institutions last week. As has been the case for some time, supply and not demand limits loan trading volumes.
Dan Stimpson, CPA
Senior Vice President