The Small Business Administration (SBA) plays an important economic development role by lending money to small businesses, often described as our economy’s primary growth engine.

America’s nearly 30 million small businesses create two out of every three net new private sector jobs and employ more than half of the nation’s workforce.¹ Through capital support and business development programs, the SBA helps small businesses grow revenue and sustain jobs in their communities, in addition to supporting economic recovery following local disasters.

Small businesses historically have had less access to credit than large businesses.² By securitizing SBA loans for investors, financial institutions can lower their lending costs, which can support expansion of their SBA lending activities. In addition, securitized SBA loans offer investors the chance to participate in the growth of SBA lending programs.

Small Businesses Are a Force in the American Economy.

The SBA’s definition of small business varies somewhat among sectors and industries, typically based on numbers of employees and receipts.³ The definition is meant to help small businesses across sectors secure SBA loans, win contracts with the government, and access general tools that can help them compete against larger corporations.

While the definition may vary, the role of small businesses in America’s economy is substantial. Goldman Sachs, in its 2019 report, The Voice of Small Business in America, cited the SBA’s Office of Advocacy when it reported, “Small businesses comprise 99% of all employer firms and employ nearly half of the American workforce.”

Securitized Loans Are a Key Segment of the Bond Market

Securitized bonds can be meaningful diversifiers in a fixed income portfolio. Largely comprised of asset-backed securities (ABS) and mortgage-backed securities (MBS), securitized bonds are created by pooling a group of financial assets and then selling slices of them to investors, thereby providing exposure to a variety of the underlying assets.

Securitization frees up a financial institution’s regulatory capital -- the assets that banks are required to hold by their financial regulators to remain solvent. In addition, securitization can offer issuers higher credit ratings and lower borrowing costs.

MBS can be backed by either residential or commercial mortgages. ABS are backed by non-mortgage-related financial assets, such as auto loans, student loans and credit card receivables. Securitized SBA loans are another less-well-known form of securitized assets.

Three Main Forms of Securitized SBA loans

Securitized SBA loans in the market can take three main forms:

An active secondary market for securitized SBA loans means that lenders can consistently sell the guaranteed portion of a SBA loan, increasing a lender’s liquidity position and enabling more loans issuance.

All three types of securitized SBA loans are structured as single-class, pass through certificates, so all loans have the same place in the cash flow waterfall. In other words, there are no tranches that would create a senior or subordinated form of debt.

Aside from fixed vs floating rate and maturity tenors, the key differences between different SBA bonds are liquidity and the embedded prepayment protection features built into the bonds. The DCPC’s for example have a prepayment penalty feature that is passed along to the investor whereas the others do not have this same protection. The DCPC’s are the largest and most liquid among the three programs and have a regular primary issuance calendar slot every month. The others tend to issue smaller, more one-off deals in the market.

Benefits and Risks of Securitized SBA Loans*

Conclusion: Securitized SBA Loans Could Add Value to Many Portfolios

Through securitization, certain risks in the underlying securities are mitigated by the pooling of these assets. Additionally, in a fixed-income portfolio that is focused on either corporate or other government debt, including ABS and MBS issues, securitized SBA loans may offer a distinct and complementary source of yield and risk. That can provide a degree of diversification through relatively low correlation with these other assets.

At Breckinridge, we seek to build diversified, customized bond portfolios that can counterbalance riskier assets in periods of economic distress and uncertainty. When appropriate, we will consider securitized SBA loans for client portfolios.

In conclusion, we believe securitized SBA loans can diversify portfolios, offering an additional source of government-guaranteed yields.

*Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.

#252686 (Rev 5/19/21)

[1] SBA Reimagined: Powering the American Dream, Small Business Administration FY 2018-2022 Strategic Plan.

[2] The Federal Reserve Bank of San Francisco, https://www.frbsf.org/economic-research/publications/economic-letter/2011/july/securitization-small-business/. July 2011.

[3] U.S. Small Business Administration, https://www.sba.gov/document/support--table-size-standards, 2019.

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