September 25, 2017
Last week was extremely active with portfolio managers adding both floating-rate and fixed-rate SBAs to their portfolios. Floating-rate additions were mostly new issue equipment-backed pools, although seasoned real-estate pools were also in the mix. The semi-annual SBIC issuance continues to be a fixed-rate component of a barbell investment strategy.
Floating-Rate 7(a) Pools
- Last week many portfolio managers focused on the new issue equipment-backed pools as they became available. New issue equipment-backed pools recently traded at prices 113-115, yielding north of 1.75% 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
- Some investors have been adding yield to their portfolios by picking up fixed-rate SBAs. In many instances the most recent SBIC issuance is being used as the longer term investment in a barbell investment strategy. The SBIC issuance included a 10-year, non-amortizing certificate. The issuance pool size was just under $855 million, with a fixed coupon of 2.518%, 45 bps over Treasuries.
Government Guaranteed Loan Trading
- Loan trading activity is slowing as the 3rd quarter comes to a close later this week. 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.
Demand for floating-rate and fixed-rate SBAs continues to be strong with a variety of structures available in the market. New issue equipment-backed pools and seasoned real-estate-backed pools were actively traded last week.
Greg Roll, CFA
Senior Vice President