SBA Securities A Strategic Addition to your Portfolio

Transcription

1 Objectives History & Characteristics SBA Securities A Strategic Addition to your Portfolio Fred Eisel Chief Investment Officer Investment Guidelines & Analysis Examples Other considerations & best practices

2 Does Fed increase rates 2-3 more times? Effective Federal Funds Rate What happens to the Prime Rate? Bank Prime Loan Rate Percent Jan 99 Oct 01 Jun 04 Mar 07 Dec 09 Sep 12 Jun 15 Mar 18 Source: Board of Governors of the Federal Reserve System/FRED Percent Aug 55 Dec 61 May 68 Oct 74 Feb 81 Jul 87 Dec 93 May 00 Sep 06 Feb 13 Source: Board of Governors of the Federal Reserve System (US)/FRED

3 Treasury Curve Getting Flatter Treasury Curve Getting Flatter

4 Treasury Curve Getting Flatter Treasury Curve Getting Flatter

5 Rising short-term rates?? Great time to finally look at floaters?? SBAs are a very nice addition to your investment portfolio Mostly, if not all, fixed rate bonds May extend with higher rates lower cashflows back to you Callables, MBS, etc. SBA History

6 SBA History Small Business Administration (SBA) established in 1953 Mission was to aid and assist small business Primary function is to provide financing 7(a) loan program SBA History Business loans originated by approved lenders, typically banks Need to maintain strict lending standards SBA guarantees 75%, bank retains the rest Maintain servicing

7 SBA History Loan comes from the lender Borrower must be eligible and creditworthy Requirements are broad Loan is then sold to an SBA pool assembler in secondary market SBA History Prior to 1984, loans sold individually Limited buyers Less liquid After 1984, allowed SBA pool assemblers to create pools of loans Better liquidity Increased market

8 SBA History After 2001 Implemented prepayment penalties on longer pools October 2017 Recent changes on how SBA treats prepayments, SBAs will look very similar to MBS pass thru securities Recent prepayment speeds have increased, but will be easier to track moving forward SBA Pool Characteristics Pooling

9 SBA Pooling Pooling is completed by an approved pool assembler SunTrust, FTN, etc. are approved pool assembler Must be approved by the SBA

10 SBA Pool Parameters Minimum of 4 loans in a pool Minimum of $1 mil aggregate pool balance All loans must float using same index (could be Prime or LIBOR) with same reset

11 SBA Pool Parameters All loans must be current Gross loan rates must be within 200 bps (2%) of each other SBA Pool Parameters The maximum difference in maturity among loans included in any one pool is 20% The maturity date of the longest loan in the pool represents the maturity date on the entire pool Keeps WAM (weighted-average maturity) buckets separate

12 Payments & Settlement Colson Services is fiscal and transfer agent SBAs are DTC eligible Payments have an 85-day delay FHLB takes as collateral SBA WAM (weighted average maturity) Categories <8yrs Working capital and/or equipment 8-11 yrs Typically exclusively equipment yrs Equipment/real estate/business acquisition

13 SBA WAM Categories/Buckets yrs Mostly real estate >21 yrs All real estate 8-11yrs & >21yrs WAMs account for most of the market SBA Pool Characteristics Investor

14 SBA Pools Fully amortizing and pay monthly principal and interest Coupons reset monthly or quarterly, based on a spread to the Prime rate No periodic or lifetime caps SBA Pool Characteristics Unconditional government guarantee for timely P&I payment 0% risk weighting Maturity of 7 to 25 years

15 SBA Pools Backed by business loans that vary by industry type and geography The lack of periodic and lifetime caps on SBA pools provide diversification Great asset in a rising rate environment Great cashflow hedge to your MBS portfolio SBA Pools Standard pools Par to premium prices tied to prime (4.75%) General coupon range is: Prime minus 2.70% to Prime plus 1.075% range This reflects the variety of rates on the underlying loans Standard pools numbers start with 50 SBA Newer ones starting with 510

16 SBA Pools WAC pools Introduced in 2009 Pool rate is set to the weighted average net rate on all loans in the pool Not as prevalent Pool number start with 52 SBA SBA Pools All about Prepayments For the SBA investor, the main concern is the speed of prepayments Prepayments are measured by CPR

17 Prepayment Characteristics Prepayment Characteristics Because of the premiums, prepayment assumptions are the biggest factor Less influenced by changes in interest rates than traditional mortgage-backed securities SBAs are affected more by factors such as business cycles and the shape of the yield curve

18 Prepayment Characteristics Prepayment speeds accelerate as the yield curve flattens Prepayment speeds on SBA pools typically increase as PRIME moves above the 10-year Treasury Yield Curve Rate Current Yield Curve Flattening Yield Curve Provide a cash flow hedge to a portfolio of MBS 1yr 3yr 5yr 10yr 20yr 30yr Years

19 Prepayment Characteristics Prepayments are relatively flat early in the life of the loan SBAs issued after 2001 and with a maturity of 15 years or greater have prepayment penalties Can t refinance into another SBA loan Prepayment Are Slow to Start Newly issued pools will prepay slowly No incentive for borrower to re-fi early on in loan Can t re-fi into another SBA, so business loans need to be readily available for the borrower Longer SBAs have prepayment penalties

20 Prepayment History Prepayments come in two forms: Prepayment Measurement Prepayments are measured by: Actual borrowers prepaying their loans either by paying additional principal or through refinancings Defaults come back to the investor as a prepayment at par Constant Prepayment Rate, or CPR Rate, or speed, at which loans prepay over their normal amortization schedule

21 Prepayment Vector Accounting for the Premium CPR Rate Prepay Vector CPR The appropriate amount of premium must be amortized The faster the premium is amortized, or written off, the lower the investment yield during that amortization period Right now CPR 0.0 Period Some use 3 mo average of their portfolio CPR Not recommended

22 SBA Prepayment Speeds Prepayment Speeds

23 SBA Prepayment Speeds Prepayment History Historic prepayment speeds for all SBA issuance available PSBA screen Ask us for Bloomberg details

24 SBA Prepayment Speeds - PSBA SBA Prepayment Speeds - PSBA

25 SBA Prepayment Speeds - PSBA SBA Prepayment Speeds - PSBA

26 SBA Prepayment Speeds - PSBA SBA Prepayment Speeds - PSBA

27 SBA vs. MBS Buying an interest in pool of loans But prepayment drivers are vastly different Floating rate & no caps, collateral at the FHLB Great cashflow hedge vs. MBS holdings Accounting for the Premium Premium risk Methodology for writing down premium Impacts monthly income Talk to your CPA

28 SBA Analysis & Investing SBA Pools Diversification Still need to diversify by: Dollar price Seasoning Number of loans Original WAM

29 SBA Diversification - Price Premium prices Prices can range from 100 to close to 120 Higher premium prices not a bad thing, if managed Look at portfolio s weighted average price SBA Pools SBA Pool Cusip Orig Pool Size Orig Face Avail Factor Curr Face Avail Orig Current Index Spread Resets/Yr Issued Maturity Price BEY WAL BEY WAL MJB6 $ 21,900,644 $ 5,900, $ 5,900, PRIME % 4 3/1/2018 3/25/ $ PRIME % 4 11/1/ /25/ MGG8 39,232,524 $ 1,000,000 $ ,602 $ 3,700, PRIME % 4 2/1/2018 5/25/ MHV4 30,246,894 $ 7,700,000 $ $ 25,500, PRIME % 4 1/1/2018 4/25/ MG94 82,876,325 $ 26,000,000 $ $ PRIME % 4 3/1/2018 2/25/ MH85 88,893,175 $ 9,200,000 $ ,200,000 $ 13,957, PRIME % 4 2/1/2018 1/25/ MHX0 14,016,310 $ 14,016,310 $ $ PRIME % 4 2/1/2018 5/25/ MHQ5 51,888,589 $ 8,000,000 $ ,979,598 $ 3,075, PRIME 1.325% 12 11/01/12 11/25/ LKM2 15,075,941 $ 8,792,596 $ $ 13,875, PRIME % 4 11/1/ /25/ MGF0 42,761,889 $ 14,000,000 $ $ 14,376, PRIME % 4 1/1/2018 1/25/ MHJ1 34,220,786 $ 14,453,000 $ TBA Pools Loans TBA Apr TBA 24,000,000 $ ,000,000 $ PRIME % 4 04/01/18 04/25/ BEY = Bond Equivalent Yield WAL = Expected Weighted Average Life SBA LOAN TYPES Working Capital and Inventory: 7 10 Years Machinery and Equipment: Years Real Estate: Securities offered through ProEquities, Inc., a registered Broker-Dealer and Member of FINRA and SIPC. Protective Securities is a division of ProEquities, Inc. Securities and insurance products offered are not financial institution deposits, have no financial institution guarantee, not FDIC/NCUA insured, and may involve loss of principal.

30 SBA Diversification Seasoning Seasoning is how long the SBA has been in the market 3 months of seasoning means the pool has been out three months Real estate backed pools have prepayment penalties for the first 3 yrs SBA Diversification Seasoning Seasoning matters Seasoned SBAs and past prepayment ramp Add new and seasoned SBAs

31 Prepayment Vector CPR Rate Prepay Vector Period CPR SBA Diversification Loan Count Each pool has a small number of loans It s all about building a portfolio More loans stabilize prepayments

32 SBA Pools SBA Pool Cusip Orig Pool Size Orig Face Avail Factor Curr Face Avail Orig Current Index Spread Resets/Yr Issued Maturity Price BEY WAL BEY WAL MJB6 $ 21,900,644 $ 5,900, $ 5,900, PRIME % 4 3/1/2018 3/25/ $ PRIME % 4 11/1/ /25/ MGG8 39,232,524 $ 1,000,000 $ ,602 $ 3,700, PRIME % 4 2/1/2018 5/25/ MHV4 30,246,894 $ 7,700,000 $ $ 25,500, PRIME % 4 1/1/2018 4/25/ MG94 82,876,325 $ 26,000,000 $ $ PRIME % 4 3/1/2018 2/25/ MH85 88,893,175 $ 9,200,000 $ ,200,000 $ 13,957, PRIME % 4 2/1/2018 1/25/ MHX0 14,016,310 $ 14,016,310 $ $ PRIME % 4 2/1/2018 5/25/ MHQ5 51,888,589 $ 8,000,000 $ ,979,598 $ 3,075, PRIME 1.325% 12 11/01/12 11/25/ LKM2 15,075,941 $ 8,792,596 $ $ 13,875, PRIME % 4 11/1/ /25/ MGF0 42,761,889 $ 14,000,000 $ $ 14,376, PRIME % 4 1/1/2018 1/25/ MHJ1 34,220,786 $ 14,453,000 $ TBA Pools Loans TBA Apr TBA 24,000,000 $ ,000,000 $ PRIME % 4 04/01/18 04/25/ BEY = Bond Equivalent Yield WAL = Expected Weighted Average Life SBA LOAN TYPES Working Capital and Inventory: 7 10 Years Machinery and Equipment: Years Real Estate: SBA Diversification - WAM Most important than all those factors is diversifying WAM Shorter WAM buckets vs. longer (real estate) WAM buckets Investor can focus on certain WAM buckets Securities offered through ProEquities, Inc., a registered Broker-Dealer and Member of FINRA and SIPC. Protective Securities is a division of ProEquities, Inc. Securities and insurance products offered are not financial institution deposits, have no financial institution guarantee, not FDIC/NCUA insured, and may involve loss of principal.

33 SBA Pools SBA Pool Cusip Orig Pool Size Orig Face Avail Factor Curr Face Avail Orig Current Index Spread Resets/Yr Issued Maturity Price BEY WAL BEY WAL MJB6 $ 21,900,644 $ 5,900, $ 5,900, PRIME % 4 3/1/2018 3/25/ $ PRIME % 4 11/1/ /25/ MGG8 39,232,524 $ 1,000,000 $ ,602 $ 3,700, PRIME % 4 2/1/2018 5/25/ MHV4 30,246,894 $ 7,700,000 $ $ 25,500, PRIME % 4 1/1/2018 4/25/ MG94 82,876,325 $ 26,000,000 $ $ PRIME % 4 3/1/2018 2/25/ MH85 88,893,175 $ 9,200,000 $ ,200,000 $ 13,957, PRIME % 4 2/1/2018 1/25/ MHX0 14,016,310 $ 14,016,310 $ $ PRIME % 4 2/1/2018 5/25/ MHQ5 51,888,589 $ 8,000,000 $ ,979,598 $ 3,075, PRIME 1.325% 12 11/01/12 11/25/ LKM2 15,075,941 $ 8,792,596 $ $ 13,875, PRIME % 4 11/1/ /25/ MGF0 42,761,889 $ 14,000,000 $ $ 14,376, PRIME % 4 1/1/2018 1/25/ MHJ1 34,220,786 $ 14,453,000 $ TBA Pools TBA Apr TBA 24,000,000 $ ,000,000 $ PRIME % 4 04/01/18 04/25/ BEY = Bond Equivalent Yield WAL = Expected Weighted Average Life Bloomberg Screens SBA LOAN TYPES Working Capital and Inventory: 7 10 Years Machinery and Equipment: Years Real Estate: Years Securities offered through ProEquities, Inc., a registered Broker-Dealer and Member of FINRA and SIPC. Protective Securities is a division of ProEquities, Inc. Securities and insurance products offered are not financial institution deposits, have no financial institution guarantee, not FDIC/NCUA insured, and may involve loss of principal.

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51 SBA Prepayment Speeds SBA vs. MBS Buying an interest in pool of loans But prepayment drivers are vastly different Floating rate & no caps Great cashflow hedge vs. MBS holdings

52 Best Practices Diversification Price, loan term, WAM, seasoning Adequate analysis Premium accounting methodology Investment Authority Investment Authority Discuss and review with Board & ALCO Good fit in a well diversified portfolio

53 Policy Considerations Premium limit as a percentage of capital Detail how the investor is buying the SBA Base case CPR at purchase Rate ramp Detail how is the investor writing down premium What methodology are you using Document! Support Let us know if you want more information Call your Protective rep We can send you inventories daily/weekly We have access to the entire street

54 Conclusion SBA history SBA characteristics SBA Analysis Thank you!! Fred Eisel Chief Investment Officer