Q. Are SBA Pools carried on the books as loans or investments?
A. While individual SBA loan guaranteed portions may be purchased for the loan portfolio, SBA Pools are government guaranteed securities that are booked in the investment portfolio.
Q. What is the risk weighting of SBA Pools?
A. SBA Pools are 0% Risk Weighted Assets. They are unconditionally guaranteed as to timely principal and interest payments by the full faith and credit of the US Government. SBA Pools have the same guarantee as US Treasuries.
Q. What are some of the most common reasons investors buy SBA Pools?
A. The most popular features of SBA Pools are:
- High Credit Quality: Full faith & credit U.S. Government guarantee of timely principal & interest payments.
- Low Risk Weighting: 0% Risk Weighting
- Rate Sensitivity: Variable SBA Pool rates adjust frequently and have no caps. SBA rates maintain a strong correlation to the prevailing interest rate environment.
- Protect the Market Value of the Portfolio: Variable SBA Pool rates adjust to the prevailing rate environment at least quarterly with no caps. As such, market values are relatively stable as compared to other fixed income investments.
Q. Why do most SBA Pools trade at premium dollar prices in the market?
A. SBA Pools have a unique combination of favorable characteristics and above-market interest rates that command premiums in the market. For example, a 0% Risk Weighted asset with a quarterly adjusting, un-capped variable interest rate of say, Prime Rate net (currently 3.50%), is obviously worth a premium dollar price. Prepayment performance is a key component of pricing levels at any given time. The fact that premiums have persisted since the first pools were issued in 1985 suggests that the asset class has historically performed well as contrasted against investor prepayment expectations. Please contact your representative for additional details on SBA prepayment data.
Q. Are premiums guaranteed?
A. No. Principal and accrued interest are fully guaranteed, but premiums are not. As such, premiums are widely considered the primary risk exposure to SBA Pool investors.
Q. Do SBA loans have prepayment penalties?
A. Yes. All SBA loans with original maturities of 15-years or longer have mandatory prepayment penalties of 5-3-1% (with a 25% annual exclusion). If, for example, the borrower were to voluntarily pay off the loan during the first year, there would be a 5% penalty on 75% of the outstanding balance.
Q. Will I receive the prepayment penalty?
A. No. Penalties on SBA 7(a) loans are payable to the Small Business Administration.
Q. Are there any fixed rate SBA Pools?
A. Yes, there are fixed rate SBA Pools, though they are issued infrequently and represent a very small portion of the market.
Q. Do the originating lenders retain any risk?
A. Yes. The lender typically holds 25% (the un-guaranteed portion) of the loan on their books. Moreover, the lender only has a conditional guarantee on the 75% portion of the loan. The lender must follow the guidelines of the SBA program including servicing the loan for its entire life to keep the government guarantee intact. The moment the 75% portion is sold into the secondary market, the guarantee to the investor becomes an unconditional full faith and credit US Government guarantee. This arrangement ensures that (a) the investor is not exposed to the lenders servicing of the loan, and (b) that the lenders have an ongoing incentive to service the loans properly.
Q. Can I get a prospectus on an SBA Pool?
A. No. As with any government guaranteed security (including US Treasuries), there is no prospectus issued for SBA Pools.
Q. Can I see the guarantee language?
A. Yes. Use this link [link to Sample SBA Pool Certificate] to view a sample SBA Guaranteed Loan Pool certificate. You will find the guarantee language stated on the face of the certificate.
Q. How can best manage my premium risk exposure?
A. Diversification is the most effective means of managing premium risk exposures. The greater the number of underlying loans, the lesser the effect of any one prepayment, and the more likely the portfolio prepayment experience will mirror the performance of the known universe of SBA loans. To see actual prepayment speed data for all SBA Pools issued in the past 10 years, simply type <PSBA> <Enter> in your Bloomberg terminal. If you’re not a professional Bloomberg subscriber, request a copy of the most recent report from your representative. Another strategy commonly used to manage prepayments is to target new issues to take advantage of a tendency for slow prepayments during the first year or two. Ask your representative for details on this and other strategies aimed at minimizing and/or properly pricing prepayment risk.
Q. Can I get Community Reinvestment Act (CRA) credit for investing in SBA’s?
A. Yes, provided the loans are located in your CRA assessment area, and otherwise qualify for CRA. Since regulatory treatment can vary, please verify with your regulators.
Q. What are delay days, and how do they affect my payment?
A. Delay days represent the point from the beginning of the accrual period of the underlying loans, following through as the monies go from borrower to lender, lender to FTA and, ultimately, to the investors. SBA Pools have stated delay days of 84, and actual delay days of 54 (the difference is due to the fact that SBA loans pay in arrears). For example, the borrowers February 1st payment covers interest for January, and is payable to the SBA Pool investor on March 25th.
Q. When and how do I receive payments?
A. Monthly P&I payments are guaranteed on a timely basis by the full faith and credit of the United States Government. Your monthly payments are automatically deposited in your DTC account on the 25th of the month.