U.S. small business loan ABS will likely undergo higher delinquencies for the first half of 2007, because of shifting economic conditions and credit concerns.
Specifically, securitizations of unguaranteed portions of Small Business Association (SBA) loans averaged 7.07% from January 1999 and October 2006, about 4.1 times more than the 1.72% average for conventional small business loans, according to Fitch Ratings, which attributed the difference to the collateral and borrower profile.
Fitch Ratings detailed its findings in The Business Loan Bulletin, intended as a semiannual publication that will discuss topics relevant to small business loan ABS investors. The inaugural issue was released this month.
Often secured by a mix of real estate and non-real estate collateral, ABS loans experience greater volatility, default rates and loss severity. Ultimately, the loans tend to have higher loss rates, because recoveries on the non-real estate collateral, which often includes machinery and equipment, are not as consistent as real estate. Also, SBA borrowers often have weaker credit profiles than that of conventional small business loan borrowers, further undermining the performance of those ABS deals.
Even so, Fitch reported, recent additions of unseasoned small business loan collateral, lower credit quality borrowers within SBA collateral and more equipment collateral supporting SBA transactions prompted an increase in ABS delinquencies and a divergence in performance between SBA and conventional loans.
Although trends for delinquency rates for SBA and conventional business loans ran parallel to each other from 1999 through mid-2003, periodic additions of large, unseasoned securitizations by the small business-lending units of General Electric Capital Corp. and Lehman Brothers Small Business Finance resulted in higher delinquency rates from June 2003 onward. Even when Fitch removed those deals from consideration in the index, small business delinquency rates continued to increase through 2005. Beginning in 2001, most of the trouble could be traced to three First International Bank (FIB) transactions, 1991-1; 2000-1; and 2000-2, that experienced high delinquencies on loans backed by collateral used in textile and manufacturing industries. Ongoing delinquencies and subsequent defaults with borrowers in the manufacturing, metals/steel mill and millwork/textiles industries reduced available credit enhancement to transactions supported by such collateral.
Among conventional business loan securitizations, delinquencies decreased from 1999 through 2005. Still, delinquency rates increased with averages of 2.93%, 3.07% and 2.86% in 2001, 2002 and 2003, respectively. There too, the increase primarily stemmed from performances in three FIB loan securitizations, from 1998-A, 1999-A and 2000-A, which experienced delinquencies among borrowers in textile and manufacturing industries.
The outlook for that sector was not entirely gloomy, according to Fitch, which predicted that late-stage delinquencies would likely decrease in the same time frame. Furthermore, the rating agency said that even though there was a noticeable upward trend of delinquencies among loans aged 180 days and more, this dynamic usually unfolds in the second quarter.
"If younger delinquency buckets continue to capture a greater proportion of total delinquencies, pressure on defaults within the transactions may be alleviated," wrote Du Trieu, a director at Fitch Ratings.
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