UnderstandingSBA504
InterestRates
May, 2012
FromBorrowerstoInvestorsandBack
Issuerand Trustee (The Bank of New York)
Debentures
Underwriters (MerrillLynch, CSFB)
Funds
Investors
CertificatesCertificates
DebenturesFunds
Guarantee on Certificates
DCFLLC
(Fiscal Agent)
Debentures
Funds
Central Servicing Agent (Colson ServicesCo.)
Loan
Proceeds
SBALoan ApprovalGuarantee
Guarantee on Debentures
Notes
Small Business Borrowers
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ThreeTypesofInterestRatesin504
DebentureRate:Theratethatdeterminesinterest paidsemi-annuallytoinvestorsinDCPCs.
NoteRate:Themonthly-payequivalentofthedebenture rate. Borrower P&I portion of monthlypaymentsandprincipalamortizationschedulearecalculatedusingthenoterate.
EffectiveRates:Ratescalculatedinclusiveof P&I,CDC,borrowerandCSAfees. Effective ratesareprovidedto CDCsonafull-termbasis and in five-yearsegments.
No APR-typeofrateiscalculated.
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HowistheDebentureRate
Determined?
Debenture Rate=swaprate+spreadtoswap.
SwapRate = treasury yield + swap spread.20- year 504 loan uses 10-year swap rate, 10-year
504loanuses5-yearswaprate.
Pricing.Fiscal agent and underwriters agree ontheswaprateplusthespreadtoswap. Thefiscalagent accepts the debenture rate and obtainsapprovals from Treasury and SBA.
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DebentureandNoteFeaturesDiffer
Feature / Debenture / NoteInterest rate / Debenture rate / Note rate
Payment date / Semi-annual / Monthly
Amortization / Semi-annual / Monthly
Prepayment / Semi-annual / Semi-annual
Prepay penalty / Scheduled / Scheduled
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WhyDotheFeaturesDiffer?
Debenture semi-annual paymentwaschosentoappealto governmentandcorporatebondinvestorswhoexpectsemi- annual payments. Borrowers make monthly payments.
Semi-annualprepaymentrestrictionandprepaymentpenalties resultinamuchlowerinterestrateforsmallbusiness borrowers. Anoptiontoprepayatany timewithnopenalty would cost well over another point on the debenture rate.
Historically, about half of borrowers have prepaid.Allborrowersshouldnotpayahigherratesosomecanprepay.
Rich historicaldata appeal to investors.504programboasts datasincelate1986. Thisisakeysellingpointtoinvestors.
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HowistheNoteRateDetermined?
Note rate: Themonthly-payequivalentofthedebenturerate. Simpletimevalueofmoneyconceptbutsophisticatedcalculationrequired. Typicallyhasbeenabout8BPabovethedebenturerate.
Derivation:ThesemiannualdebentureP&Ipaymentisdividedby6toobtainamonthly payment. Thismustbefurtherbrokendowninto
(a)interestdueand(b)paid-downprincipal(sothat principaldue=0afterthelastscheduledpayment).Noterateisobtainedusingiterativecalculations (e.g., solverinExcel).
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ConvertingDebentureRatetoNoteRate
(estimateusingHP12ccalculator)
Assume5.80%rate,$350,000orig.prin.,20-yr.
Inputsn =40,i =2.9(rate/2), PV= 350000.
Solve forPMTwhich= -14898.04.
Clear registersusing {f} {FIN}and{f}{REG}.
Inputs n =240,PV= 350000, PMT= [-14898.04/
6]convertssemi-annualpaymenttomonthly.
Solve foriwhich=0.48986.Annualizedrate=
0.48986%x12=5.878%,within0.001pointof
CSA’s reported rate for 6/02.
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HowAreEffectiveRatesDetermined?
Monthlyinterestratesderivedby includingthe impact
of ongoingfees(i.e.CDC,borrower,CSA).Feesadjust
everyfive yearsbut principalamortizesmonthly.CSA
calculatestheserates,notNADCOor DCFLLC
Effectiveratesdonotincludetheimpactofupfrontfeesand thereforearenotAPRs. 2.65pointsis worthabout
32BP attoday’sratesover20 years.
Effective rateforanygivenmonth=(interest+CDC+SBA+CSA) /baseUPBx1200.Where “baseUPB”= openingUPBforeachnew
monthlycalculation(e.g.UPB@ mos.1, 61,121,181).
Monthly annualizedeffectiveratesarethenaveraged(weighted bybalance),reportedbyCSAandpostedonthe NADCOwebsite.
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EffectiveRates:Example
5.88% note, 0.625% CDC, 0.41% SBA, 0.10% CSA
Pmt.# / UPB / Interest / CDC / SBA / CSA / Eff.%1 / 350,000 / 1,715 / 182 / 120 / 29 / 7.01
60 / 297,047 / 1,455 / 182 / 120 / 29 / 7.22
61 / 296,023 / 1,450 / 154 / 101 / 25 / 7.01
120 / 225,865 / 1,107 / 154 / 101 / 25 / 7.37
121 / 224,493 / 1,379 / 117 / 77 / 19 / 7.01
180 / 130,427 / 639 / 117 / 77 / 19 / 7.83
181 / 128,587 / 630 / 67 / 44 / 11 / 7.01
240 / 2,466 / 12 / 67 / 44 / 11 / 65.04
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70.0%
EffectiveRatesRiseOverTime
40.0%
12.0%
11.0%
10.0%
9.0%
8.0%
7.0%
6.0%
5.0%
121416181101121141161181201221
239
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WhyDoEffectiveRatesRiseOverTime?
Principal Amortization vs. (Terraced Fees x 1000)
$400,000
$350,000
$300,000
$250,000
$200,000
$150,000
$100,000
$50,000
$0
121416181101121141161181201221
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HowCanYouEstimateEffectiveRates?
NADCO has a web-based ()estimated effective rates calculator for NADCOmembers. If you’re nota member:
Gobackaboutsixmonthsandlookattherangeof spreadsbetweeneffectiverates(withtheappropriate combinationoffees)andthedebenturerates. The dataisavailabletoanyoneat.
Lookattheaverage,highandlowspreadsand developaruleofthumbspread. Addthisspreadto yourestimateddebenturerate. Reviewyourestimate every few months.
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NADCO’sEffectiveRatesCalculator
20-Year504EstimatedPaymentandEffective RateCalculatorThiscalculatorESTIMATESonly. Forsimplicity's sakeitignoresthepartial 1stmontheffectonamortizedprincipalandinterestdue.
ItshouldbewithinafewBPofactualeffectiveratesandcloseonpaymentamounts. Colson's numbersarealways official.
REQUIREDINPUTSINBLUE / RESULTSINYELLOW
Theinformationhereinhasbeenobtained fromsources thatwebelievetobereliable,butwedonotguaranteeitsaccuracy orcompleteness.
National Association of Development Companies and Development Company Finance LLC, 2012
All rights reserved.
Enterdebenturerateandfeesasdecimalvalues(e.g.5%as.05) / ===EstimatedPenaltyAmounts==
Estimated / Estimated / PenaltySchedule / "Pmt#"ismonthlypaymentnumber
DebentureRate / 4.340%
1,000,000
0.625%
0.393% / EffectiveRates / MonthlyPmts. / Year / Penalty / Pmt# / Amount / Pmt# / Amount
LoanAmount / 1st5Years / 5.62%7,207.39
5.68%7,044.87
5.82%6,842.37
6.53%6,590.07 / 1 / 4.3400%
3.9060%
3.4720%
3.0380%
2.6040%
2.1700%
1.7360%
1.3020%
0.8680%
0.4340% / 6 / 42,830.71
42,133.64
37,278.97
36,623.41
31,958.46
31,349.54
26,886.20
26,329.44
22,080.26
21,581.58 / 66 / 17,559.85
17,125.60
13,345.36
12,982.34
9,458.44
9,173.94
5,922.07
5,723.88
2,760.64
2,657.08
CDCfee / 2nd5Years / 2 / 12 / 72
Borrowerfee / 3rd5Years / 3 / 18 / 78
CSAfee / 0.100% / 4th 5Years / 4 / 24 / 84
(CSAfeeisfixedat0.1%) / FullTerm / 5.75% / 5 / 30 / 90
6 / 36 / 96
NoteRate / 4.40574%
0.00 / 7 / 42 / 102
EndingBalance / 8 / 48 / 108
9 / 54 / 114
10 / 60 / 120
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disclaimer
Theinformationhereinhasbeenobtainedfromsourcesthatwe believetobereliable,butwedonotguaranteeitsaccuracy orcompleteness.
National Association of Development Companies
Development Company Finance LLC, 2012
Allrightsreserved.
This presentationmaybedownloadedfromthe
NADCOwebsite:
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