U.S. small business securitization should grow in 2014 as lending by non-bank lenders continues to outpace banks and the investor base for this asset class expands.
Standard & Poor's hosted a roundtable discussion on the small business securitizations in December. Panelists participating on the roundtable said that in 2008, most traditional bank lenders significantly reduced their commitment to the small business borrower and materially tightened their lending guidelines.
That dynamic has only worsened as banks, driven by regulatory requirement, look to maintain higher capital requirements. The lack of bank credit available has created more opportunity to non-bank lenders.
“The absence or the reduced participation of bank lenders serving the small business borrower has created extraordinary opportunities for non-bank specialty finance companies (and their equity backers) to originate and securitize small business loans (broadly defined) at very attractive risk-return profiles,” said Matthew Perkins, senior managing director, head of ABS/RMBS banking at Guggenheim Securities LLC; and also a speaker in the S&P roundtable.
Barry Sloane, President and CEO, Newtek Business Services, who also spoke at the S&P roundtable said that lending opportunities for his business are growing “because business owners have gotten more frustrated with traditional financial partners like banks.”
At the same time, appetite for small business loan securitization has grown. According to Perkins, the investor base for asset-backed notes secured by the unguaranteed portion of SBA 7(a) loans could potentially grow if the market saw more frequent and larger issuances of this asset class. For now the deals are typically sized between $25 million to $35 million.
“There has always been a core group of capital markets investors that have been interested and knowledgeable about small business originators (broadly defined) and their related loan products,” said Perkins.
James Kim, senior vice president at Hana Small Business Lending, who also spoke at the S&P roundtable event, expected the medical sector to be an emerging space for small-business lending this year.
“This sector has been relatively ignored by traditional lenders in recent years and has used alternative financing for its capital needs,” said Kim. “Hana can provide the necessary financing through its SBA or factoring (asset-backed lending) vehicles to accommodate and grow with this sector.”
Sloane predicted that the best economic areas this year are related to manufacturing. Another area of growth will be in the energy sector.
For now, growth in small business securitization is limited to only the 14 non-bank lenders that are licensed to originate SBA 7 loans.
Since the credit crisis, Newtek and Hana are the only two among the 14, to have issued issue asset-backed notes secured by the unguaranteed portion of SBA 7(a) loans. Their combined issuance volume since 2010 totals $102 million.
However, according to Kim several new groups are “very interested in purchasing the available licenses from lenders that are dormant or participate little.” “The popularity of the program coupled with additional active lenders should increase the demand for this type of securitization, in our opinion, if the overall economy continues to improve,” said Kim.
Other forms of small business lending, which have seen increased origination and securitization activity since the credit crisis include three- to five-year, term and revolving loans from middle market lenders. According to Perkins these loans may periodically be repackaged into CLO issuances.
Securitization of small to mid-ticket equipment leases and loans could also experience an uptick. Another area that could see some volume growth is the securitization of merchant cash advances or unsecured, high-coupon, small balance loans with three- to six-month repayment terms.