First sale of SBA loans characterized as success

The U.S. Small Business Admini-stration Aug. 25 announced its first sale of SBA loans to the private sector. The sale is the first of its kind for a federal credit agency under the Credit Reform Act.

"The first asset sale is another exciting step in the agency's aggressive strategy for reinventing itself as a 21st century leading-edge institution," said Aida Alvarez, SBA administrator.

The loan sale is part of a program of sales that will reduce the balance of direct and acquired SBA loans by up to $10 billion during the next three years. The program also will establish a mechanism for selling up to $500 million in new loans each year thereafter.

The first sale realized $195 million in proceeds, a $90 million premium over the $105 million that the government estimated it would receive if it held the loans to maturity. Because this is the first time that this loan product type has been sold in this magnitude, the SBA in a release characterized the premium as exceptional.

In addition to placing the SBA in the secondary market for these kinds of loans, the sale will pave the way for additional reductions in SBA servicing costs and related operating expenses, the agency's release said.

The sale, conducted on the existing authority of the Small Business Act, is part of a government-wide initiative to sell federal loan assets to the private sector.

The sale included 4,060 small-business loans that the SBA had either made directly or had previously guaranteed for private-sector lenders. The unpaid principal balances for the loans included in the sale totaled approximately $332 million, with about half the loans classified as nonperforming or under-performing. The loans were divided among 26 loan pools in order to maximize value, the SBA said.

SBA received 135 bids from 25 different bidders for the 26 different loan pools. The loan pools were sold in two packages: to CFSC Consortium LLC of Minneapolis and to Loan Participation Partners Ltd. of Dallas.

SBA Deputy Administrator Fred Hochberg, who approved the two winning bids, said the agency was very pleased by the interest in SBA's first loan sale.

"Market participation in this sales effort was very strong," Hochberg said. "SBA is pleased with the large number of bids that it received and with the prices offered for the loans. The high level of participation will be a momentum builder for the continuing sales program."

The sale came after nearly two years of planning by the SBA and its private sector contractors. Work on a second sale is under way.

The money realized from the sale is to be turned over to the U.S. Treasury.