CH Capital SBA 504 Debenture

Embed Size (px)

Text of CH Capital SBA 504 Debenture

CHCapitalPartnersLLCKnowwhoyouareworkingwith Alwaysinnovatingtohelpsmallbusinesscreatejobsforfellow Americans

SBA504DebentureasaAAAGovernmentBond By SokH.CordellSr.ManagingDirector

504AlwaysFundingSmallBusinesses

Sections503(1958),504and505(1986)oftheSmallBusinessInvestmentAct provideforguaranteeandpoolingofCDCissueddebenturesandguarantee andissuanceofDevelopmentCompanyParticipationCertificates (DCPCs). Section503guaranteesfullandtimelydebenturepayments.Section504 guaranteesfullandtimelypaymentstoDCPCholders. Providesmonthlyaccesstofixedrate,longtermfundinginthepubliccapital marketsnototherwiseavailabletosmallbusiness. Usesaprovensecuritizationprocesstocreateappealinginvestmentsresulting inefficientlypricedfixedratefundingforsmallbusinessborrowers. 24yearsofhistoryhaveledtostableperformancethroughmultipleinterest rateandeconomiccyclesandthroughlargecrises.Over$44billionin certificateshavebeenissuedwith$23billionoutstanding.

SBA504CapitalMarketsTeam

FiscalAgent DCFLLC.Managethefundingprocesstoobtainthebest monthlydebenturerateavailableforborrowers. Underwriters CreditSuisseand BankofAmerica.Market,sellandtrade DCPC,takecapitalrisk,pooldebentures,productresearch. IssuingAgentandTrustee The BankofNewYorkMellon.Holddebentures issuedbyCDCs,issueDCPCsasSBAsagent,distributeP&ItoDCPCholders, reportoutstandingpoolstatistics. CentralServicingAgent ColsonServicesCorp.Processloans,reportnewpool statisticstoDCFC,collectloanpayments,payoutproceeds.SubsidiaryofThe BankofNewYorkMellon. LegalCounsel BinghamMcCutchen,LLP. Programandtransactionlegal advisorstounderwritersandDCFC.

SBA504DebentureBusinessCycleCDCCreates40% secondLien Investorbuysthe SBAloan Bankcreates conventionalfirst loan

RatesSetforth byTreasury

90daysforthe loantobesold

MerrillLynchor CreditSuissethe packagersforthe loan

BridgeLenderfor CDC2nd lienloan

AttorneyReview forSalesofthe loan

ColsonService Accountissetup

FromBorrowerstoInvestors:TheProcess

Issuers

Debenture

Certificate

Underwriters Merrill/Credit Suisse

FundsCertificate

Investors

FiscalAgents

Funds

ColsonServices

debenture

LoanProceeds

SBA Guarantee

Guarantee

CDC501c3

Notes

Banks Borrowers

DCPCCharacteristics DCPCsexactlymatchthefullamortization,interestrate,maturityand prepaymentpenaltyscheduleofthepooleddebentures.P&Iispaid semiannually. Prepaymentpenaltyschedulestartsat100%+debentureinterestrate and declinesratablytoparafter5years(10yearmaturity)or10years(20year maturity).Prepaymentsareallocatedonaprorata basis. Accelerationofprincipaluponloandefaultisatpar. ObligationoftheUnitedStatesforfederalincometaxtreatment State/Localtaxtreatmentiscasebycase.ERISAOK. Rangeofcoupons:high10.75%(10/8720yr),low1.97%(9/1010yr).Original WAC5.7%,outstandingWAC5.2%. Projectedaveragelifeonanew20yearparpoolis8.2yearsat5%CPR (assumingzeroCPRitis11.3years).

SBA504DebentureCollateralCharacteristics

ProgramStart:1986 TotalLoansIssued:$48Billion Issuanceperyear:$3.5Billion TotalOutstanding:$24Billion

SBA504DebentureInterestRate

InterestRateshavebeendecliningfornearlyadecade

GNMA,FNMA&SBADebentureSwapCurve

HowistheDebentureRateDetermined?

Announcement and Price Guidance. Several days prior to pricing, the fiscal agent and underwriters agree on a spread range over the appropriate interest rate swap rate and announce the offering. Marketing. Dependingonthereceptiontothedeal,pricingoccurssomewhere withintherange.Ifthereisinsufficientdemand,anewrangeisdetermined andthedealagainmarketedand/orthereisunderwritertakedownofthe unsoldamount.

HowistheDebentureRateDetermined?(continued)

DebentureRate =swaprate+spreadtoswap. SwapRate =treasuryyield+swapspread.20year504loanuses10yearswap rate,10year504loanuses5yearswaprate. Pricing. Fiscalagentandunderwritersagreeontheswaprateplusthespread toswap.Thefiscalagentacceptsthedebenturerateandobtainsapprovals fromTreasuryandSBA.

WhatAreInterestRateSwapRates? Interestrateswapratesaretheratescounterpartiesusetoswapfloatingand fixedratecashflows. Swaprate=treasuryyield+swapspreadfortheappropriatematurity. Swapratesbecamepricingbenchmarksforallmortgagebackedsecuritiesin thelate1990s. FindswapratesintheWSJorhere: http://www.federalreserve.gov/releases/H15/

SBA50420YearNewIssueSpreadHistory504 20 yr. 504 Debenture Rate Spreads vs. 10 yr. Treasury Yield (top), and 10 yr. Swap Rate (bottom) (BP)350

300

250

200

150

100

50

Sep-88

Sep-90

Sep-92

Sep-94

Sep-96

Sep-98

Sep-00

Sep-02

Sep-04

Sep-06

Sep-08

0 Sep-10

ActiveSecondaryMarketinDCPCsSBA 504 Secondary Market Trading Volume ($MM) and Percent of New Issue Volume (rhs)2,400240%

2,000

200%

1,600

160%

1,200

120%

800

80%

400

40%

Q404

Q205

Q405

Q206

Q406

Q207

Q407

Q208

Q408

Q209

Q409

Total

traded/issued

Linear (traded/issued)

Q210

-

0%

WhoBuysDCPCs? Insurancecompanies yield,safetyandgovernmentsecuritystatus. BankPortfolios yield,safety,governmentsecuritystatus.Heldforsaleand tomaturity. MoneyManagers onthebehalfofotherinstitutionsandindividuals. Relativevalue/spreadbuyers.Includesmutualfunds,hedgefunds. Minimumoriginaldenomination $25,000with$1,000multiplesthereafter.

WhyDoInvestorsBuyDCPCs?

FullfaithandcreditoftheU.S.Highestquality. Absoluteyield,5.7%WACoverprogramlife.Wideselectionofcouponsand prices. Spreadovertreasuriesincompensationfortheborrowerprepaymentoption andlowerliquidity. Monthlyofferingcalendar. Wellsupportedsecondarymarket. Reasonablypredictablecashflows. Longhistory,richprepayment/accelerationdata.

Disclaimer Theinformationhereinhasbeenobtainedfromsourcesthatwebelievetobe reliable,butwedonotguaranteeitsaccuracyorcompleteness.