Though the small business loan sector hit the public asset-backed market this year with a $600 million deal done by the Money Store - anything but typical, according to sector specialists - the real news is the slow disappearance of the Small Business Association (SBA) structured deal.
"I think there's more and more non-SBA deals getting done," said Kent Becker of Moody's Investors Service. "There's more flexibility because the SBA does not have oversight, so the issuer and the banker can structure the deal anyway that they want. When it comes to SBA deals, the SBA basically mandates a particular type of a structure."
Issuers are also choosing non-SBA (or non-7A) deals because of the prepayment penalties associated with them. "It makes it a lot more desireable to investors," one source said. "The deals aren't going to pay down as quickly, and there's a lot more volatility."
Generally, the source added, the non-7A borrower has better credit, and typically the product has a lower-loan-to-value.
Though the small business loan sector does not seem to be growing at monumental rates, the divergence from 7A structure is allowing for a range of innovations.
"I think you may see some of the deals that have prime rate collateral being done as Libor floaters," said one source. "First International Bank in New England did one and it was very well received. We may even see deals done with fixed rate collateral done as Libor floaters.
"I think you'll see more liquidity on the single-A and triple-B pieces than you have over the past year," the source said.
However, sector analysts agree that small business loans, excluding deals done by the Money Store, will likely remain private sector deals.
"There aren't as many investors who are educated in small business loans, because it's not really that big of a product, that they feel like putting the effort into, or having people learn about it," a banker said. "At least it hasn't been. Not to say it's been ignored because it hasn't been. We've had no trouble selling our deals. It's just not as widely participated in the market as it should be."
