DCF LLC Funding Process
NADCO 2014 Annual Meeting
May 1, 2014
Colorado Springs, CO
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SBA 504 Capital Markets Team
•
Fiscal Agent — DCF LLC. Manage the funding process to obtain the best available debenture
rate for borrowers.
Frank Keane – Fiscal Agent, DCF LLC.
•
Underwriters — BAML and Credit Suisse. Market, pool debentures, sell and trade DCPC, take
capital risk, provide product research.
Leland Bunch III – Managing Director, Bank of America Merrill Lynch – SBA 504
underwriter.
Karen Cady – Director, Credit Suisse – SBA 504 underwriter
•
Issuing Agent and Trustee — The Bank of New York Mellon. Hold debentures issued by CDCs,
issue DCPCs as SBA's agent, distribute P&I to DCPC holders, report outstanding pool statistics.
Glenn McKeever – Vice President, Bank of New York Mellon – SBA 504 trustee.
•
Central Servicing Agent — Wells Fargo Corporate Trust Services. Process loans, report new
pool statistics to DCF LLC, collect loan payments, pay out proceeds..
Brian Gagnon – Program Group Leader, Wells Fargo CSA Team
Rupinder Suri– Servicing Manager, Wells Fargo CSA Team
•
Legal Counsel — Bingham McCutchen LLP. Program and transaction legal advisors to
Underwriters.
Jeff Johnson – Partner, Bingham McCutchen LLP - SBA 504 program bond counsel.
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From Borrowers to Investors: The Process
Small
Business
Loans
Small
Business
Loans
CDCs/CSA
Debentures Issued
DCF LLC
Debentures and Guarantee Agreement provided by SBA sold
under Debenture Purchase, Pooling and Exchange Agreement
Underwriters
Debentures and Guarantee Agreement transferred to Trustee
under Trust Agreement
BNYM
Participation Certificates (DCPCs) issued under Trust Agreement
BAML/CS
DCPCs
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Investors
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5
SBAP Funding Process
with Deadlines for April 2014 Sale
•
February 28 – March 13 – CDC submission of forms to Sacramento for No
Adverse Change.
•
February 28 – March 13 – Upon approval of No Adverse Change by
Sacramento request file be placed in legal folder for District Counsel review.
•
Thursday , March 27 –Cut -Off Date - Upon District Counsel approval, send
documents to Wells Fargo for review and resolution of Loan Package errors.
•
Monday, March 31 – Wells Fargo sent CDC Confirmation Emails to CDCs.
•
Friday, April 4 – Wells provides Fiscal Agent with preliminary numbers for the
sale, identifying the number of loans and total size.
•
Monday, April 7 – Pulled Loan Deadline. CSA and CDC’s have resolved all
loan documentation issues.
•
Tuesday, April 8 – official Announcement Date for the sale.
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Problem Loans
•
Total Funded Loans
Problem Loans
On average, 119 loans each month are submitted with missing/incorrect information
Monthly Average
October 2013 – March 2014
Problem Loans vs. Loans Funded, by Month
October 2013 – March 2014
23%
(119)
77%
600
500
564
527
556
497
400
424
300
382
200
(399)
100
129
113
89
128
105
146
January 2014
February 2014
March 2014
0
October 2013
November 2013 December 2013
Top 10 Problem Loan Types
October 2013 – March 2014
W-9 Form Data Missing/Incorrect
142
Any Other Error
104
102
100
SAA Dates Incorrect (p.3)
SAA Wiring Instructions…
SAA Fees Incorrect (p.5)
44
42
ACH Form Data Missing/Incorrect
SAA Amounts Incorrect/Missing (p.4)
36
32
29
26
Debenture Data Missing/Incorrect
SAA Amount(s) Incorrect/Missing (p.2)
SAA Approval Date Incorrect (p.3)
0
20
40
7
60
80
100
120
140
160
Inquiry Tracking
•
Received more than 1,500 calls from borrowers – 250 more than from CDCs – which
stretches staff resources
Calls Received
August 2013 – March 2013
Borrower
1522
CDC
1276
Other
101
District Office
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0
200
400
600
800
1000
1200
1400
1600
Resolution Rate Trending
Same day
One-day
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
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Role of Underwriters
•
Total SBA 504/CDC issuance: $60.6 billion, with $27.6 billion outstanding.
•
When the underwriters launch each SBA deal, that announcement is sent to
each banks’ mortgage, agency, corporate and interest rate products sales
teams across their network of global offices in US, Europe and Asia.
•
Goal is to get as many customers interested at the "talk" level, and depending
upon investor demand, attempt to tighten spread so that borrowers get the
best possible interest rate available. The objective of every sale is to be
strongly over-subscribed, balancing the interests of borrowers and investors.
•
Research teams publish market primers to educate and broaden the investor
base. Monthly default and prepayment statistics are provided to investors for
security analysis.
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Role of Underwriters
•
Underwriters: marketing, sale, pricing, hedging and swaps.
•
New issues: 27 investors across 16 states purchased the new SBAP
transactions year-to-date 2014 from BAML and Credit Suisse.
•
Secondary market trades: BAML and CS traded $1.8 billion DCPC bonds in
2013 and $900 million in 2014 ytd.
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SBAP Funding Process with Deadlines
For April 2014 Sale
• By the Announcement Date Bingham has prepared and
circulated an updated draft of the Offering Circular, requested
CUSIP, and drafted the transaction documents to be executed by
Underwriters, SBA and Fiscal Agent.
• Prior to Pricing Date, Bingham receives signature pages from
Underwriters and SBA, sign-off for tax and ERISA disclosure in
the Offering Circular, E&Y’s sign off on Offering Circular and
confirmation of deal size from Wells Fargo. Fiscal Agent and
Funding Committee have conference call Wednesday April 9 to
discuss terms of the sale.
• Wednesday, April 9 - Fiscal Agent and Funding Advisory
Committee discuss status of sale. Wells Fargo delivers sale file to
the Trustee.
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SBAP Funding Process w/Deadlines
For April 2014 Sale
• Thursday, April 10 – Pricing Date. 2014-20D DCPCs are priced
on a 10:30 conference call with the Underwriters, who execute
sales and swap transactions with investors. Fiscal Agent calls and
e-mails U.S. Treasury and SBA for approval of the rate, e-mails
rate to Bingham for completion of the Offering Circular and
posting with FINRA, also e-mails rate to Ernst & Young to
complete calculation of WAL’s. Fiscal Agent then sends e-mail
with terms of the sale to the Trustee, the CSA, and Funding
Advisory Committee, completes the Offering Circular markups
and has telephone read through with Bingham. Bingham
sends Fiscal Agent, SBA Secondary Markets Director and SBA inhouse legal counsel the completed transaction documents to be
executed and returned to them for the closing table. Offering
Circular when completed is released to Underwriters to be used to
market the transaction.
• Thursday, April 10 – The Trustee delivers sale file back to Wells
Fargo updated to include Debenture prepayment premium and
amortization schedules.
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SBAP Funding Process w/Deadlines
For April 2014 Sale
• Friday, April 11 – Wells Fargo generates and loads
amortization schedules and provides NADCO with Effective
Rates. Wells Fargo delivers physical Debentures to the
Trustee.
• Tuesday, April 15 - Pre-Closing Date. Bingham sends
executed copies of transaction documents and opinions to the
Trustee and confirms with Lead Underwriter and SBA closing
table is complete. Bingham contacts Wells Fargo and Lead
Underwriter to confirm wire amount and time of transmission of
the wire.
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SBAP Funding Process with Deadlines for
April 2014 Sale
• Wednesday, April 16 – Funding Date. Bingham conducts a
conference call with Fiscal Agent, Lead
Underwriter, the Trustee, the CSA, and a Funding Advisory
Committee representative to confirm proceeds of the sale.
Lead Underwriter with the Trustee calls DTC to close the
deal and release the DCPC /certificates (which are in
electronic book-entry form) to the Underwriter’s
account. Immediately after the closing the Underwriters
distribute DCPC/certificates to the investors. Wells Fargo
verifies and releases net debenture proceeds to interim
lenders.
• Trustee delivers reports to Wells Fargo detailing amounts
due for May 1st payment to investors for related previous
issuances.
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SBAP Funding Process with Deadlines for
April 2014 Sale
• April 21-30 – Trustee mails copies of Debentures with
amortization and prepayment premium schedules to CDCs.
• Wednesday, April 30 – Wells Fargo sends funds via wire
transfer to Trustee for payment of semi-annual principal and
interest to investors of related previous issuances.
• Thursday, May 1 – Trustee releases funds for above to
investors through DTC. Trustee releases monthly reports
(pool status etc.) to Fiscal Agent and investors.
• Post-Closing- Within 30 days of funding, Bingham prepares
a CD with all closing documents for the working parties.
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SBA 504 Coupons
9.0%
10yr UST
Spread to UST
8.0%
6.77
7.0%
6.0%
5.0%
4.0%
3.11
3.0%
2.0%
1.0%
0.0%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: NADCO, Credit Suisse
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504 refinancing program boosted SBA deal sizes
• Debt refi program expired in September 2012.
• 504 deal sizes became smaller as the remaining loans
in the pipeline have since been processed.
600m
Deal Size
3mo moving avg
500m
400m
300m
200m
100m
0m
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Source: NADCO, Credit Suisse
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SBA 504 Investors by Type
Insurance,
26%
Hedge Fund,
2%
Foreign, 1% Pension,
0.1%
Money
Manager,
41%
Bank, 30%
Source: Credit Suisse, BofAML
Based on 2013 and ytd 2014 SBAP deals
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SBA 504 Investors by Geography
Foreign, 2%
West, 7%
Northeast,
44%
Midwest,
17%
South, 30%
Source: Credit Suisse, BofAML
Based on 2013 and ytd 2014 SBAP deals
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CRE lending is rebounding
Total originations in 2013 was $358 billion, exceeding
2005 volume.
$billion
600
$508
500
$406
400
$358
$345
300
$244
$184
$181
200
$119
$82
100
0
2005
2006
2007
2008
2009
2010
2011
2012
2013
Source: MBA, Credit Suisse
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Wall of maturity for small balance CMBS loans
• Over four thousand small balance CMBS loans are scheduled
to mature between 2015 – 2017.
• Opportunity for SBA lenders to meet the financing gap.
• Many small balance loans that have yet to mature have high
coupons relative to current market rates, representing additional
opportunities for SBA lenders.
CMBS Maturities: $ Balance
CMBS Maturities: Number of Loans
Loan Size
Year
2014
2015
2016
2017
2018
2019
2015-17
< $2.5m $2.5 - $10m
$0.8 bn
$7.1 bn
$1.9 bn
$18.1 bn
$2.3 bn
$22.9 bn
$2.2 bn
$22.2 bn
$0.3 bn
$1.9 bn
$0.2 bn
$0.8 bn
$6.4 bn
$63.1 bn
Loan Size
> $10m
$22.6 bn
$60.0 bn
$95.2 bn
$97.5 bn
$11.5 bn
$5.1 bn
$252.7 bn
Year
2014
2015
2016
2017
2018
2019
2015-17
Source: Credit Suisse, BofAML, Trepp
2014 DCFLLC
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< $2.5m
609
1,340
1,560
1,464
334
199
4,364
$2.5 - $10m
1,615
3,921
4,676
4,439
462
227
13,036
> $10m
931
2,159
2,866
2,882
367
135
7,907
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CMBS lenders focus less on small loans
• Many pre-crisis small balance lenders no longer exist or are not
participating in the market (e.g. Washington Mutual, LaSalle,
etc.).
• Only 6% of loans in new CMBS deals are small balance loans
($2.5 million or less).
• Prior to the recession, small balance loans represented 20% of
the conduit CMBS loans.
Current Conduit CMBS
By Loan Count
Pre-crisis Conduit CMBS
By Loan Count
< $2.5m,
6%
< $2.5m,
20%
> $10m,
34%
> $10m,
45%
$2.5$10m,
46%
Source: Credit Suisse, BofAML, Trepp
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$2.5$10m,
49%
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10-year Treasury Rate
• 10yr UST rates are likely to go up, not down, given the QE3 is
ending.
• With rates expected to rise, the incentives for refi one’s own
portfolio is not that compelling.
7.0
BofAML forecast
Credit Suisse forecast
6.0
5.0
4.0
3.0
2.0
1.0
0.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: Credit Suisse, BofAML, Bloomberg
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Disclaimer
The information herein has been obtained
from sources that we believe to be reliable,
but we do not guarantee its accuracy or
completeness.
Development Company Finance LLC 2014
.
All rights reserved.
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