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504 Loan Interest Rate Report: September 2015

Sep 2015

The interest rate for 20-year Small Business Administration (SBA) 504 loans that funded in September remained unchanged from August and continues to stay under 5%. The 10-year rate dropped to its lowest level in over two years. Frank Keane, fiscal agent for Development Company Finance LLC-the entity responsible for marketing and selling 504 funding securities - comments in a special report about the Federal Reserve's recent decision to not yet raise the federal funds rate and the result on 504 rates for the near future.

504 loans are funded by the sale of bonds (aka debentures) which are pooled and sold on Wall Street each month (see Understanding the 504 Loan Interest Rate). The bonds that funded this month's 20-year 504 loans were sold to investors at 2.82%, marking the sixteenth month in a row the bond rate has remained below 3%. This resulted in a final effective interest rate (the all-in cost to a borrower) of 4.90% for September (compared to 4.90% for August and 4.96% for July). Year to date, the 20-year rate has averaged 4.79%.

For 10-year 504 loans (which are set bimonthly), the bonds were sold at 1.71% resulting in a final effective interest rate of 4.23% for September/October (the lowest the 10-year rate has been since May of 2013). Year to date, the 10-year rate has averaged 4.34%.

Frank Keane, fiscal agent for Development Company Finance LLC - the entity responsible for marketing and selling 504 funding securities - commented following the September bond sale:

“Lower for Longer-The defensive trades in front of (the Sept. 16-17) FOMC (Federal Open Market Committee) meeting proved unnecessary as global concerns outdid the modestly improved domestic indicators, leaving interest rate policy unchanged. (The) ten-year treasury note (CT-10), our pricing benchmark for 20-year debentures (moved) higher into (the Sept. 17) announcement only to rally at week's end, closing 7.5 bps lower than when we last priced on September 10th.

“What Does the Decision Mean? The wording of the announcement identified global concerns (read China) and its impact on emerging markets as a consideration for not changing policy. The Fed has focused on full employment as the engine to drive higher interest rates, but has now introduced an international perspective for its consideration, and that further clouds the transparency for Fed policy. Chairwoman Yellen was candid about emerging market weakness and cautioned about the risk of an abrupt slowdown in China. Whether an abrupt slowdown or just gradual weakening of Chinese GDP, the impact is widely felt since they are the biggest trading partner for emerging market economies. Its reduced demand for raw materials impacts commodity prices and foreign exchange rates resulting in weaker global growth.

“Speaking of lower community prices, they are impacting domestic Gas and Oil businesses which are filing for bankruptcy at a rate of 4.8%, the sector's highest level since 1999 and double the rate of businesses in general. The volume of defaulted bonds YTD stands at $10.4 billion and yields in this sector of the junk bond market are as high as 11%.

“CT-10's closing rate of 2.135% is its 200-day Moving Average and represents a rate the market has frequently settled at in weakness and strength going back four months. Indications are that we will remain with this low rate sentiment as the Fed exercises increased patience before normalizing monetary policy.

“Even their modest projections seem inflated as officials still maintain a 2015 rate hike is probable. Here is the schedule of projected federal funds rates:

2015-.375%

2016-1.4%

2017-2.6%

2018-3.4%

Long-Run-3.5%

“20-year Debenture Rates and Spreads-If we are going to see this 2.135% Treasury rate serve as a magnet until the Fed is confident of the global market's tolerance for higher rates we might see our debenture rate hold near its two most recent levels of 2.82%, compared to our twelve-month average rate of 2.73%. The challenge will be to maintain historical pricing spreads, because that is where investors will demand more for their participation. The absence of clarity will encourage investors to remain neutral as they sift through endless commentary about economic growth, commodity prices, and global concerns,” Keane said.

The SBA 504 Loan Program provides up to 90% below-market, fixed interest rate financing with repayment terms up to 20 years for the purchase ofcommercial propertyand/or fixed heavy dutymachinery and equipment.

504 loans are paired with private-sector commercial loans, providing up to $5 million of small business financing for standard and public policy projects and up to $5.5 millionpergreen initiativeandsmall manufacturer projects(these are SBA loan portions only; there isno limiton overall project dollar size).

Click Here to Get Started on an SBA 504 Loan

For more information about SBA 504 loans in Florida,contact a Florida First Capital Loan Officer hereor email us atinfo@ffcfc.com. Phone: 850.681.3601 or toll-free at 888.320.5504.