SBA Loan Market Revives As Small Business Credit Remains Tight
By Romy Varghese, Of DOW JONES NEWSWIRES
PHILADELPHIA -(Dow Jones)- An esoteric marketplace for pooled and packaged
U.S. Small Business Administration loans has revived, thanks to government
initiatives and improved financial conditions.
The thaw should encourage lenders to make more SBA loans, which have fallen
this year partly because of the dormant market. Still, with SBA loans supplying
only part of small business funds and other types of credit tight, more progress
is needed to help the sector that employs half of the U.S. workforce.
"We don't want to go back to the bubble mentality, but it's very frustrating
to see a business that has the capacity to borrow and invest not to have access
to these funds," said Therese Flaherty, director of the Wharton Small Business
Development Center.
Before the crisis struck last year, easy credit was boosted by the
securitization of everything from mortgages to credit card debt and small
business loans. About 40% to 50% of SBA loans are securitized and sold to
investors, said Eric Zarnikow, associate administrator at SBA's Office of
Capital Access.
The SBA's primary loan program, known as 7(a), is the most commonly
securitized. Lenders provide funds to a small business, and the SBA backs a
percentage of the loan amount. The lenders sell the guaranteed portions to
designated broker-dealers, who pool them into securities. These are sold
typically at a premium over par.
It's a small marketplace. At its height about $4 billion in securities were
sold, with buyers generally institutional investors such as foreign banks.
This assembly line came to a halt last fall when credit markets froze. Lenders
couldn't offload loans, and broker-dealers were sitting on unsold inventory. If
investors were willing to bite, they demanded a lower premium - which didn't
make it worthwhile for dealers to buy more loans or lenders to make more of
them. New SBA loans plummeted, prompting the government to step in with several
initiatives.
The Federal Reserve made these securities eligible for the Term Asset Backed
Securities Loan Facility, which provides investors low-interest loans to buy
certain kinds of securities.
This had a major impact, observers said, bringing in a new class of investors
who use leverage to achieve returns.
Also, under the stimulus act enacted in February, the SBA eliminated or
reduced loan fees and upped the guarantees on the 7 (a) loans.
A third prong was the Treasury Department's commitment of $15 billion to buy
the securities. Although rules, such as executive compensation, are discouraging
participation, "it's giving the market a better tone and investors feel
comfortable knowing there is some backstop," said Chris Callahan, co-head of
CMBS trading at Bank of America Merrill Lynch.
Meanwhile, stress in the financial markets has eased, normalizing key lending
rates used to evaluate these securities.
Over the past three months, premiums have returned to near pre-crisis levels
and volumes are up. The majority of the $1 billion in broker inventory has been
cleared, according to Zarnikow, and $300 million to $350 million in loans are
being sold to brokers monthly, back to average levels. So far this year, $1.2
billion of new SBA 7(a) pooled securities have been sold, said Callahan.
"The market today is functioning pretty well," said Zarnikow.
The market's improvement has helped SBA lending rebound since February. July's
volume in its two major loan programs is just 6% lower than that of last year.
And demand from TALF investors can fuel more SBA loans. Over $4 billion in 7(
a) pooled securities could be sold in 2010, estimated Horace Carter, Morgan
Keegan's head of fixed income trading.
But other avenues of financing receive no backing, and they remain
constricted. Remaining TARP funds "should be focused on shoring up lines of
credit that are really the lifeblood of small businesses," said Todd McCracken,
president of the National Small Business Administration.
-By Romy Varghese, Dow Jones Newswires; 215-656-8263; romy.varghese@
dowjones.com
(END) Dow Jones Newswires
08-24-090940ET
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