Wednesday, April 28, 2010

The SBA and the Fed- Part II

How long is an "extended period"?

From Calculated Risk

Short answer: Longer than many analysts expect.

First we can compare to the "considerable period" language in 2003:

June 25, 2003: Lowered Rate to 1%, Unemployment Rate peaked at 6.3%

August 12, 2003: “the Committee believes that policy accommodation can be maintained for a considerable period.” Unemployment rate at 6.1%

December 9, 2003: Last statement using the phrase "considerable period". Unemployment rate at 5.7%

January 28, 2004: the Committee believes that it can be patient in removing its policy accommodation. Unemployment Rate 5.7%

May 4, 2004: “the Committee believes that policy accommodation can be removed at a pace that is likely to be measured.” Unemployment Rate 5.6%

June 30, 2004: FOMC raised the Fed Funds rate 25 bps. Unemployment Rate 5.6%

So "extended period" is probably 6+ months after the language changes - the next meeting is June 23rd and 24th, so the earliest rate hike would probably be in December (barring a significant pickup in inflation or rapid decline in unemployment).

The SBA and the Fed

Today, the Federal Open Market Committee said that it will continue to keep interest rates low for an "extended period."

The key language about rates stayed the same: "The Committee ... continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period."

It would appear that the savings from the low interest rates available with the SBA 7(a) loan program should continue for an “extended period.”

So what is the current rate on a SBA 7(a) loan? Here's the answer from the SBA:

Currently, most lenders are offering a rate of Prime plus 2.75%.

For the complete release from the Federal Open Market Committee, go here:

Monday, April 26, 2010

The SBA and a gormandizer



A greedy person.

From French gourmandise (gluttony). Both a gourmand and a gourmet enjoy good food, but a gourmand is one who eats to excess while a gourmet is considered a connoisseur of good food.



For SBA loans, the borrower’s ability to repay the loan from the cash flow of the business is the most important consideration in the loan making process.

SBA allows lenders to determine repayment ability through either an analysis of actual cash flow or by using the “rule of thumb” method. “Rule of thumb” cash flow is defined as earnings before interest and taxes, plus depreciation and amortization, less total debt service.

According to the SBA Office of the Inspector General, the “rule of thumb” method should not be used in determining repayment ability for businesses that are on an accrual accounting basis.




SBA LIBOR Base Rate April 2010 = 3.25%

SBA Fixed Base Rate April 2010 = 6.57%

The maximum rate a lender can charge for a 7(a) loan is one of the above indices plus 2.75%

504 Debenture Rate for April

The debenture rate is 4.36% but note rate is 4.42% and effective yield

is only 5.774%.



The Federal Reserve Open Market Committee meets this week and the question is not what they will do but what they will say.

Will they continue to say that they will keep interest rates “exceptionally low” for an “extended period?”

The Fed has repeated the “extended period” language at each meeting since March 2009, over a year ago.

So how long is an extended period?

Eurodollar futures settle at a three- month lending rate that has averaged about 22 basis points more than the Fed's target over the past 10 years. Here is a summary of what the market expects for Eurodollar futures based upon the pit-traded prices at the Chicago Mercantile Exchange:

DEC10- 0.82

DEC11- 2.23

DEC12- 3.35

DEC13- 4.15

DEC14- 4.73

DEC15- 5.11

DEC16- 5.33

DEC17- 5.47

DEC18- 5.60

What does all this mean?

It would appear that the savings from a low variable rate of interest should persist for an “extended period."

Tuesday, April 20, 2010

The SBA and defenestrate

To throw someone or something out of a window.
From Latin de- (out of) + fenestra (window).

Don't defenestrate SBA loans just yet.

The Recovery Act SBA loan provisions have been extended through May 31. New legislation provided $80 million for 7(a) and 504 fee reductions/waivers and the 90% 7(a) guarantees. The $80 million is twice the amount provided for in the April extension.
30 DAY LIBOR: 0.26
90 DAY LIBOR: 0.31
SBA Fixed Base Rate April 2010 = 6.57%
SBA LIBOR Base Rate April 2010 = 3.25%

504 Debenture Rate for April
The debenture rate is 4.36% but note rate is 4.42% and effective yield is only 5.774%. ________________________________________________
I guess the recession is not yet over.

Last Monday, the National Bureau of Economic Research’s Business Cycle Dating Committee — the group that determines the start and end dates of recessions — said that it could not yet declare an end to the recession that began in December 2007.
How can that be?

The economy expanded at a 5.6 percent annual rate in the fourth quarter, the most in six years. But if you look closely, inventories provided the biggest boost by adding 3.8 percentage points to gross domestic product, based on data from the Commerce Department in Washington. The danger is that sales won’t rise as much as companies expect, leaving them with more inventory than they need and setting the stage for an economic slowdown later in the year.

Do we face a “significant risk” of a double-dip recession?

It depends on what the Federal Reserve does. The economy may slow as the Fed begins withdrawing a record $1 trillion in excess cash that propped up the banking system during the recession.

But the Fed won’t start doing that until inflation begins to stir.

One of the Federal Reserve’s favorite gauges of inflationary pressure is the capacity utilization rate. The Federal Reserve watches capacity utilization rates to see if production constraints are threatening to cause inflationary pressures. Bottlenecks or shortages often lead to inflationary pressures that would drive prices even higher. Several analysts have pointed to a rate between 81% and 82% as a tipping point over which inflation is spurred.

Last week the Federal Reserve reported capacity use advanced 0.2 percentage point to 73.2 percent for the month of March. Back in August it was 69.9. The August capacity level was the lowest on records dating back to 1967.

Here is what capacity utilization rates have done:
1997- 83.6
1998- 83.0
1999- 82.4
2000- 82.6
2001- 77.4
2002- 75.6
2003- 74.6
2005- 80.7
2006- 82.4
2007- 81.5
2008- 79.9
2009- 69.9
2010- 73.2

What does all this mean?

Capacity utilization rates are 3.7 percentage points above the rate from a year earlier, but capacity utilization at 73.2% is still far below normal - and 9.1% below the the pre-recession levels of 80.5% in November 2007.

Talk of the Federal Reserve raising rates is premature.

The long end of the bond market seems to agree. Two weeks ago, the U.S. sold $13 billion of 30-year bonds, the last of four note and bond auctions that week totaling $82 billion. The so-called long bond gained the most in six weeks after a $21 billion sale of 10-year notes drew the strongest demand in at least 16 years. The 30-year bonds sold drew a yield of 4.77 percent. The 30 year bond is now down to 4.67 percent.

It appears that savings from a low, variable rate of interest should persist for an “extended period.”

Happy Patriots’ Day.

The perfect holiday to wedge between that long stretch between Washington’s Birthday and Memorial Day has been found.

Monday marked the anniversary of the Battles of Lexington and Concord, the first battles of the American Revolutionary War. It is observed in the Commonwealth of Massachusetts and state of Maine (once part of Massachusetts), and is a public school observance day in Wisconsin. Now it just needs to be a national holiday.

Ralph Waldo Emerson, in his "Concord Hymn", described the first shot fired by the Patriots at the North Bridge that day as the "shot heard 'round the world."

The other shot heard around the world was the game-ending home run hit by New York Giants outfielder Bobby Thomson off Brooklyn Dodgers pitcher Ralph Branca at the Polo Grounds to win the National League pennant in 1951. The Giants won the game 5–4, defeating the Dodgers in their pennant playoff series, two games to one. An article recapping the game in the New York Daily News on October 4 was accompanied by the headline, "The Shot Heard 'Round the Baseball World". The phrase quickly spread to other media, and soon became a widely-recognized slogan for Thomson's homer. It turns out that the Giants had cheated that day. Giants coach Herman Franks with a telescope had stolen the pitching signs of the Dodger catcher, Rube Walker, subbing for the injured Roy Campanella. Franks was positioned in the Polo Grounds center field with a line-of-sight view of the catcher. A buzzer system was installed so that Franks could signal a player in the Giants' bullpen, located on the field of play in deep left field. The player would then signal the batter as to what pitch was coming.