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SBA 504 Loan Interest Rate Report: February 2018

Feb 2018

The bonds that funded February's 20-year Small Business Administration (SBA) 504 loans saw a 30 basis point upsurge over last month and also priced at the highest rate for the program in four years. However, despite the increase the resulting effective interest rate (the all-in cost to a borrower) still remains slightly under 5%.

504 loans are funded by the sale of bonds (aka debentures) which are pooled and sold on Wall Street each month. Understanding the 504 Loan Interest Rate

The bonds that funded this month's 20-year 504 loans were sold to investors at 3.22%, resulting in a final effective interest rate of 4.94% for February for standard 504 loans (compared to 4.49% in December and 4.64% in January). The 20-year effective interest rate for debt refinance loans is 4.98% for February.

The effective interest rate for 10-year standard 504 loans (which is set bimonthly) is 4.65% for January/February. The 10-year effective interest rate for debt refinance loans is 4.70% for January/February.

Frank Keane, fiscal and selling agent for SBA 504 program funding securities, commented following the Feb. 8 bond sale:

“Volatility - A word that was rarely mentioned during the steady, nine-year up trade in equities became the most common word used by analysts last week.

“Friday's eventual correction allowed the DJIA to bounce from an indicated correction level for the recent bull market, but the index still closed down 5.2% on the week. The concern than originated with the 2.9% wage growth report had been confined to the rates market, causing the 10-year rate to increase as high as 2.88%, while causing some weakness in equities. That changed quickly, spurring investors to pull $33 billion from equity funds through Wednesday, a contributing factor for the Dow to swing 1,000 points in all but one-day last week.

“Not only did that violent price action push the VIX (the Chicago Board Option Exchange's “fear index”) to a high level, it triggered a powerful trade in an inverse volatility product that allowed traders to short the VIX, a popular trade that had made traders complacent about volatility. When VIX spiked higher it forced traders with short positions in volatility to cover, pushing VIX higher still and putting more pressure on stock prices. The largest short volatility trading platform, run by Credit Suisse and known as XIV, was forced to shut down on Monday. To show how profitable it had been to short volatility, if you bought this index at the start of 2015 and held it the end of the 2017, you generated a 320% profit. When measured through Monday, the result was a total loss of 85%.

“Attention is also being focused on the potential impact of the increased deficit caused by the tax cuts and potential infrastructure spending, joined by the recent budget agreement that postponed a government shutdown. This will result in a $1.2 trillion deficit in FY19, prompting Mark Zandi of Moody Analytics to comment: ‘This is exactly opposite of what the economic textbooks say lawmakers should be doing in a full employment economy.'

“What has been the impact of five rate hikes by the Fed, the end of quantitative easing, and an improving economy on SBA 504 debenture pricing? This table charts the change from February 2014.

“The SBA 504 Loan Program has benefited from these historically low Treasury rates, even more so in 2012 when 20L was priced at 1.93%. One comparison that stands out is 2018-20B was priced 1bps lower than 2014-20B with the Treasury benchmark 18bps higher in rate. Swap spreads have tightened, as has DCPC pricing spreads to the Treasury benchmark, reflecting strong demand for a high-quality asset,” Keane said.

The SBA 504 Loan Program provides up to 90% financing at below-market, fixed interest rates and long amortization terms for the purchase of major fixed assets, such as owner-occupied commercial real estate and/or heavy duty machinery and equipment.

504 loans are paired with private-sector commercial loans and provide up to $5 million of aggregate SBA eligibility on standard 504 projects; up to $5.5 million per 504 energy efficient green project not exceed $16.5 million in the aggregate; and up to $5.5 million per eligible small manufacturing project with no limit on total SBA dollars available. These are SBA 2nd mortgage loan portions only; there is no limit on overall project dollar size.

For more information about SBA 504 loans in Florida, South Alabama or South Georgia,contact aFlorida First Capital Loan Officeror email us atinfo@ffcfc.com. Phone: 850.681.3601 or toll-free at 888.320.5504.