Monday, July 8, 2013

The SBA and chameleonic



Given to quick or frequent change.

From Latin chamaeleon, from Greek khamaileon, from khamai (on the ground) + leon (lion).


SBA lending is chameleonic.

On July 1, 2013, SBA released a revision to SOP 50 10 5(E) that revised and clarified SBA's requirements for financing change of ownership transactions with SBA guaranteed loans.

 The new guidelines allow for a change of ownership to be achieved through an asset purchase, a stock purchase or a stock redemption.

If the purchaser of the stock is an individual, then the individual and the target must be co-borrowers on the loan.

If the purchaser of the stock is an entity or if the transaction is structured as an asset purchase, then the business being acquired MAY be a co-borrower on the loan.

Generally, lenders should consider making the target business a co-borrower when the transaction is structured as a stock purchase

Lenders must also ensure that the business will not attempt to deny liability for lack of consideration on debts where it is a co-borrower with the purchasers of the stock.  If the borrower denies liability on these grounds, the SBA may not honor the guaranty.


SBA LIBOR Base Rate July 2013 = 3.20%
SBA Fixed Base Rate July 2013 = 5.34%

Debenture Rate for June    

The debenture rate is 2.45% but note rate is 2.49% and effective yield is only 4.529%.


A chameleonic Fed?

The Federal Reserve made it very clear that it plans to hold its target interest rate near zero as long as unemployment remains above 6.5 percent.

So when will the unemployment rate fall to 6.5 percent?

That’s the Fed's threshold, but not trigger, for raising the Fed's funds rate.   According to the Federal Reserve Bank of Atlanta, if the participation rate stays steady, the unemployment rate will fall to 6.5% in December 2014 if the economy adds around 185,000 jobs per month.   This is consistent with the Fed not raising rates until 2015 or later.

The Federal Reserve also made it very clear that it plans to hold its target interest rate near zero as long as the outlook for inflation doesn’t exceed 2.5 percent.

One of the Fed’s favorite gauges of inflationary pressure is the capacity utilization rate which measures how much plants and factories are being used.  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.

Keep your eyes and ears open for next week’s report of capacity utilization.

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
2004- 79.2
2005- 80.7
2006- 82.4
2007- 81.5
2008- 79.9
2009- 67.3
2010- 74.8
2011- 76.7
2012- 79.0

What does all this mean?

I don't know.

Last month the Fed reported that capacity utilization for total industry edged down 0.1 percentage point to 77.6 percent.  That was the second consecutive monthly decline. 

This week’s Treasury auction of 30 years bonds may provide some insight.

30-year bonds are among the securities most sensitive to consumer prices because of their long maturity, as inflation would erode the return on the bonds’ fixed payments for their duration.

June’s Treasury auction of $13 billion in 30 year bonds went off at a yield of 3.355 percent, the highest since March 2012.    At May’s sale of 30 year bonds, the yield was only 2.98%, the lowest yield since December.

It would appear that interest rates are going to remain the same, go up, or go down.
Ramadan begins. 

Ramadan is the ninth month of the Islamic calendar and is based upon on the visual sightings of the first crescent moon after the solstice.   This sighting of the crescent moon is done shortly after sunset.
Such a sighting has to be made by one or more trustworthy men testifying before a committee of Muslim leaders.  Determining the most likely day that the crescent moon could be observed was a motivation for Muslim interest in astronomy, which put Islam in the forefront of that science for many centuries.

Muslims worldwide observe this as a month of fasting.  The fast begins at dawn and ends at sunset.  In addition to abstaining from eating and drinking, Muslims are also called to abstain from all bad deeds. 

They are called to abstain from all bad deeds.  Aren’t we all?

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