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A successful securitization of small business loans may be a good sign for the asset-backed securities market.
Vincent Ryan, CFO.com | US
April 18, 2011
While many parts of the asset-backed securities market are on tenterhooks because of pending regulations regarding home- and commercial-mortgage securitizations, small-business lender Newtek Business Services has completed a rare kind of deal: a securitization of loans backed by the Small Business Administration. The $16 million sale of notes backed by a pool of SBA 7(a) loans was the first securitization of any kind of commercial business loan since the financial crisis, says Newtek chief executive Barry Sloane.
Although the transaction will not necessarily cause a surge in small-business lending, it may be a sign that fixed-income investors are getting hungry for these kinds of instruments once again — if they're soundly structured.
The Newtek deal earned a AA rating from Standard & Poor's, and the overcollateralization — the amount of loans backing the notes issued by the trust — was three times larger ($24 million) than was required prior to the bursting of the credit bubble, says Sloane. While it is typically the guaranteed portions of SBA loans (75% of the principal for a 7(a) loan) that attract investors in the secondary markets, Newtek securitized the unguaranteed portions of the loans it originated. However, those portions were all secured by commercial and owner-occupied real estate.
"It's a little bit like building a spec home, particularly in today's market," says Sloane of the securitization. "You never know whether the bond markets will be open or receptive."
Newtek's transaction was helped by the fact that the 7(a) market has been robust in fiscal 2011, giving the commercial lender a larger pool of loans to choose from. "[SBA lending] started picking up in mid-to-late 2009, and for the six months of [FY 2011] we've already done 80% to 85% of [FY] 2010's gross loan approvals," says Craig Cline, an SBA loan trader at Coastal Securities. According to the SBA, as of April 8, lenders had originated $12.5 billion of cash flow-based small-business loans, compared with $7.9 billion a year earlier.
At the same time, Sloane says, Newtek is seeing much higher-quality loan opportunities — deals that would normally go to commercial banks.
Newtek will use the $16 million in gross proceeds principally for making new loans and paying off a term loan with Capital One Bank. Sloane says the funding will better match the terms of its lending. That would make these deals attractive for other nonbank lenders, some of which are still having trouble financing their own balance sheets. But for now, Newtek's securitization will probably remain a rarity. Under new accounting rules, the assets and liabilities remain on Newtek's books. "It makes [securitizations] less attractive to other originators," says Sloane. "If they have to show the leverage, a lot of entities can't do these transactions."
In addition, the bonds will be subject to potential criteria changes from S&P on small-business securitizations. The credit-rating agency put out a notice of proposed changes last June but has yet to finalize them.