The number of securitizations in the "business loan" sector is expected to nearly double this year, up to as many as 10 deals from the five seen in 2001, according to a consensus of panelists at the recent securitization conferences in Arizona.

The collateral and issuers in this sector, however, have changed substantially since its previous heyday in the late 1990s, when the market was dominated by the likes of The Money Store, Bank of Yorba Linda, and First International Bank.

First off, a large component of this year's volume and about half the deals will come from middle-market lenders, such as American Capital Strategies and MCG Capital, and potential newcomers, such as Gladstone Capital Corp. Of course, some market players argue that the middle-market sector should be considered distinct from the traditional small business loan sector.

So far, the two deals over the past year or so have come from Wachovia Securities, off the bank's commercial business loan platform. Some of these companies are mezzanine lenders, and the loans are fewer and larger in size, demanding more analysis on the individual credits, as opposed to the more actuarial analysis applied to traditional small business loan pools. These securitizations are similar to CLOs, except for the fact that the asset manager is also the loan originator, often with an equity position in the borrowing company (see ASR 7/2/01).

On the more traditional side, small business finance players will continue trending away from the non-guaranteed portions of Small Business Administration 7(a) loans that were securitized more heavily in the 1990s. The market will likely be more slanted toward conventional business loans.

"It's an asset class that's evolving a bit, not because of bad performance but because of consolidation, regulation and other factors," said Kent Becker, of Moody's Investors Service.

Also, as opposed to the 1990s, companies utilizing securitization are generally finance companies without the backing of banking entities, such as CNL Commercial Finance, Business Loan Express (BLX), and PMC Capital. The Money Store, which was the only small business lender to issue en masse, was closed down by First Union, more than a year before it merged with Wachovia. First International was acquired by United Parcel Services roughly a year ago, and BYL's small business platform was spun off in 2000, into CNL Commercial Finance, which has been a market regular over the past year.

Securitizing 7(a) loans exposes lenders to the possibility of losing their Preferred Lender Status (PLP), should their portfolio currency rate, which is the inverse of the delinquency rate, fall 2.5% below the initial level.

"The point of the regulation was to make sure lenders don't go out and originate a bunch of [imprudent loans] just to securitize them," said one industry source, noting that preferred lenders do not need to have their loans to eligible borrowers approved by the SBA.

"The benefits of a PLP status are huge," said Ted Horan, director of Capital Market at BLX, which is an SBA-preferred lender, and one of just 14 finance companies approved to write SBA loans (not all are actively lending). "An investor should take good comfort in the regulation, because with the PLP so important to us, it's crucial for us to monitor our delinquency levels so that we don't risk losing that status."

According to Horan, the secondary market for the guaranteed portion of SBA 7(a) loans is quite liquid. While BLX has securitized the non-guaranteed portion of SBA 7(a) loans in the past, this year the company will bring its first conventional small business loan deal.

BLX's first deal of the year will be an SBA 7(a), scheduled for March, in the $70 million range. In addition to a second similar SBA deal, BLX is projecting two conventional deals in the $90 million to $100 million range this year, all via Wachovia Securities.

Distressed and disaster

Meanwhile, the SBA continues to actively issue debentures backed by the second-lien portion of 504 loans. These deals, generally about $100 million to $150 million in size, have been sold below the radar screen for several years, generally via Merrill Lynch or Credit Suisse First Boston, and placed with regional banks. The SBA has sold about $5 billion of these notes over the past years.

Also, the SBA has been routinely auctioning off portions of its distressed and disaster assistance portfolio of loans, which, at its peak was about $10 billion in size, now said to be approximately $7 billion. The distressed portions of the portfolio are 7(a) loans gone bad, which are then purchased from the lender by the SBA, as per its guaranty.

In perhaps a sign of things to come, last summer Lehman Brothers managed to securitize approximately $400 million worth of notes backed by these loans (both distressed and disaster assistance), via its Structured Asset Securities Corp. shelf (SASCO 2001-SB1).

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