CH Capital SBA 504 Debenture
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Transcript of CH Capital SBA 504 Debenture
CH Capital Partners LLC
SBA 504 Debenture as a AAA Government Bond
BySok H. Cordell Sr. Managing Director
Know who you are working with
Always innovating to help small business create jobs for fellow Americans
504 Always Funding Small Businesses
• Sections 503 (1958), 504 and 505 (1986) of the Small Business Investment Act provide for guarantee and pooling of CDC‐issued debentures and guarantee and issuance of Development Company Participation Certificates (DCPCs).
• Section 503 guarantees full and timely debenture payments. Section 504 guarantees full and timely payments to DCPC holders.
• Provides monthly access to fixed rate, long‐term funding in the public capital markets not otherwise available to small business.
• Uses a proven securitization process to create appealing investments resulting in efficiently‐priced fixed‐rate funding for small business borrowers.
• 24 years of history have led to stable performance through multiple interest rate and economic cycles and through large crises. Over $44 billion in certificates have been issued with $23 billion outstanding.
SBA 504 Capital Markets Team
• Fiscal Agent – DCFLLC. Manage the funding process to obtain the best monthly debenture rate available for borrowers.
• Underwriters – Credit Suisse and Bank of America. Market, sell and trade DCPC, take capital risk, pool debentures, product research.
• Issuing Agent and Trustee – The Bank of New York Mellon. Hold debentures issued by CDCs, issue DCPCs as SBA’s agent, distribute P&I to DCPC holders, report outstanding pool statistics.
• Central Servicing Agent – Colson Services Corp. Process loans, report new pool statistics to DCFC, collect loan payments, pay out proceeds. Subsidiary of The Bank of New York Mellon.
• Legal Counsel – Bingham McCutchen, LLP. Program and transaction legal advisors to underwriters and DCFC.
SBA 504 Debenture Business Cycle
CDC Creates 40% second Lien
Bank creates conventional first
loan
90 days for the loan to be sold
Bridge Lender for CDC 2nd lien loan
Colson Service Account is set up
Attorney Review for Sales of the
loan
Merrill Lynch or Credit Suisse the packagers for the
loan
Rates Set forth by Treasury
Investor buys the SBA loan
From Borrowers to Investors: The Process
Issuers
Fiscal Agents
SBA Guarantee
Colson Services
CDC 501c3
InvestorsUnderwritersMerrill/Credit
Suisse
Banks Borrowers
Funds
Debenture
Certificate Certificate
Funds
GuaranteeNotes
Loan Proceedsdebenture
DCPC Characteristics
• DCPCs exactly match the full amortization, interest rate, maturity and prepayment penalty schedule of the pooled debentures. P&I is paid semiannually.
• Prepayment penalty schedule starts at 100%+debenture interest rate and declines ratably to par after 5 years (10‐year maturity) or 10 years (20‐year maturity). Prepayments are allocated on a pro rata basis.
• Acceleration of principal upon loan default is at par.• Obligation of the United States for federal income tax treatment• State/Local tax treatment is case‐by‐case. ERISA OK.• Range of coupons: high 10.75% (10/87 20‐yr), low 1.97% (9/10 10‐yr). Original
WAC 5.7%, outstanding WAC 5.2%.• Projected average life on a new 20‐year par pool is 8.2 years at 5% CPR
(assuming zero CPR it is 11.3 years).
SBA 504 Debenture Collateral Characteristics
Program Start: 1986Total Loans Issued: $48 BillionIssuance per year: $3.5 BillionTotal Outstanding: $24 Billion
SBA 504 Debenture Interest Rate
Interest Rates have been declining for nearly a decade
GNMA, FNMA & SBA Debenture Swap Curve
How is the Debenture Rate Determined?
• Announcement and Price Guidance. Several days prior to pricing, the fiscalagent and underwriters agree on a spread range over the appropriate interestrate swap rate and announce the offering.
• Marketing. Depending on the reception to the deal, pricing occurs somewhere within the range. If there is insufficient demand, a new range is determined and the deal again marketed and/or there is underwriter takedown of the unsold amount.
How is the Debenture Rate Determined? (continued)
• Debenture Rate = swap rate + spread to swap.
• Swap Rate = treasury yield + swap spread. 20‐year 504 loan uses 10‐year swap rate, 10‐year 504 loan uses 5‐year swap rate.
• Pricing. Fiscal agent and underwriters agree on the swap rate plus the spread to swap. The fiscal agent accepts the debenture rate and obtains approvals from Treasury and SBA.
What Are Interest Rate Swap Rates?
• Interest rate swap rates are the rates counterparties use to swap floating and fixed rate cash flows.
• Swap rate = treasury yield + swap spread for the appropriate maturity.• Swap rates became pricing benchmarks for all mortgage‐backed securities in
the late 1990s. • Find swap rates in the WSJ or here:
http://www.federalreserve.gov/releases/H15/
SBA 504 20‐Year New Issue Spread History
0
50
100
150
200
250
300
350
Sep-10Sep-08Sep-06Sep-04Sep-02Sep-00Sep-98Sep-96Sep-94Sep-92Sep-90Sep-88
504 20 yr. 504 Debenture Rate Spreadsvs. 10 yr. Treasury Yield (top), and 10 yr. Swap Rate (bottom) (BP)
Active Secondary Market in DCPCs
0%
40%
80%
120%
160%
200%
240%
-
400
800
1,200
1,600
2,000
2,400
Q404
Q205
Q405
Q206
Q406
Q207
Q407
Q208
Q408
Q209
Q409
Q210
SBA 504 Secondary Market Trading Volume ($MM)and Percent of New Issue Volume (rhs)
Total traded/issued Linear (traded/issued)
Who Buys DCPCs?
• Insurance companies – yield, safety and government security status.
• Bank Portfolios – yield, safety, government security status. Held for sale and to maturity.
• Money Managers – on the behalf of other institutions and individuals. Relative value/spread buyers. Includes mutual funds, hedge funds.
• Minimum original denomination ‐ $25,000 with $1,000 multiples thereafter.
Why Do Investors Buy DCPCs?
• Full faith and credit of the U.S. Highest quality.
• Absolute yield, 5.7% WAC over program life. Wide selection of coupons and prices.
• Spread over treasuries in compensation for the borrower prepayment option and lower liquidity.
• Monthly offering calendar.
• Well‐supported secondary market.
• Reasonably predictable cash flows.
• Long history, rich prepayment/acceleration data.
Disclaimer
The information herein has been obtained from sources that we believe to be reliable, but we do not guarantee its accuracy or completeness.