Investors are being given a chance to buy shares in pools of Small Business Administration-guaranteed loans, and an SBA official said Monday that the new program could help reduce loan rates for small enterprises.
The first of the SBA loan pools was created and marketed last week by the Wall Street brokerage house Merrill Lynch.
Three other institutions--Westcap Securities of Houston, Mountain Bank of Whitefish, Mont., and Carty & Co. of Memphis, Tenn.--have been approved so far to offer similar loan pools, the SBA said. Others are expected to get authorization.
Investment houses have traded individual SBA-guaranteed loans in the secondary markets for several years, but the new arrangement makes available an interest in a pool of such loans for the first time, SBA Administrator James C. Sanders said.
Made by Private Lenders
As the new investment vehicles win acceptance, Sanders said, they should contribute "downward pressure on interest rates for the small-business borrower."
Under terms of the SBA's secondary market loan pooling program, designated financial institutions will purchase a number of SBA business loans from private lenders, assemble the loans into a pool and then sell shares of the pool to investors.
The loans themselves are made by private lenders and are guaranteed for up to 90% of the face value by the SBA. Only the guaranteed portion of the loans is eligible for inclusion in the pools.
Each pool must include no fewer than four SBA loans with a total face value of at least $1 million. The pool shares can be sold in minimum amounts of $25,000 and offer investors guaranteed, timely principal and interest payments.
Robert Andres, vice president and manager of corporate bond trading at Merrill Lynch, said the program should add to the liquidity of the lending institutions, freeing them to use the proceeds from selling the loans to make new loans. He said it should also broaden institutional interest in such loans.