Signal from Greenspan Sparks A Rush to SBA-Loan Securities

MEMPHIS - Here in the heart of blues country, dealers in securities backed by SBA loans are sounding positively gleeful these days.

The reason is simple: Investors nearly cleaned out much of their inventory of these securities after Fed Chairman Alan Greenspan indicated interest rates may have peaked. In the days after his comments, investors rushed back into the market in a frenzy.

"There is confidence building that we may have reached a plateau on interest rates," said Mark Atwill, senior vice president of guaranteed loan trading at Union Planters Bank in Memphis.

Union Planters, which operates under a wholesale trade agreement with Memphis-based Vining Sparks IBG, is not alone. Other Memphis dealers report the same surge in activity.

"With prime at 9% and the thought that maybe rates will come down, we've seen demand rise dramatically," said Andrew Saslawsky, a first vice president and salesman with Commerce Investment Corp., a subsidiary of National Bank of Commerce in Memphis.

Alan Jankowski, first vice president with Morgan Keegan & Co., said Mr. Greenspan's comments helped to nearly clean out his company's inventory of securities backed by loans with Small Business Administration guarantees.

He added the activity was especially noticeable in those securities on SBA-back loans with a cap on the interest rate. When rates were rising, investors avoided these securities for fear the cap would prevent them from earning a market return. With investors thinking rates have peaked, these instruments have returned to favor.

"It's taken investors a long time to become liquid enough to do this," said Mr. Jankowski.

The reason behind the rising demand for these securities is because of the widening spread between the prime rate - upon which floating-rate SBA loans are pegged - and other short-term interest rates like Treasuries and the federal funds rate. Typically, the spread between prime and other short-term rates hovers around 300 basis points.

When interest rates start to fall, however, prime tends to fall more slowly, creating a wider spread. As a result, investors can earn a higher yield from SBA loan securities than they can from other government guaranteed securities with nearly equal risk.

Despite the comments from Memphis dealers, total secondary market sales for February were off slightly from both the previous month and from February 1994. Colson Services Corp., the fiscal and transfer agent for the SBA's 7(a) loan program, reports that the dollar volume for loan sales in February was off 9.5%, to $143 million.

Nonetheless, there was a pickup in activity during the last week of February, when 211 loans worth $51 million were reported to Colson as having changed hands. But Clarke Ulmer, an executive vice president with the company, said volume typically picks up during the last week of every month as dealers attempt to reduce their inventory before a reporting period.

Still, Mr. Ulmer points out, these numbers may not give a complete picture of sales during the last week of February. Some investment banks send the paperwork for loan sales directly to Colson, while others route the forms through the selling banks, who then forward the information to Colson.

"It's possible they've had a run, but the sales haven't come in to us yet," said Mr. Ulmer.

Despite the official numbers from Colson, Mr. Atwill estimates last week's events caused investors to soak up as much as $100 million of SBA- loan securities during the last week of February.

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