April 13, 2020
The Paycheck Protection Program (“PPP”) authorizes up to $349 billion in SBA guaranteed forgivable loans to small businesses to pay their employees during the COVID-19 crisis. Treasury is seeking an additional $250 billion for this lending program due to strong demand from small businesses.
On April 9th the Fed announced The Paycheck Protection Program Liquidity Facility (PPPLF) which extends credit to eligible financial institutions that originate SBA guaranteed PPP loans, taking the loans as collateral at face value. Extensions of credit under the PPPLF will be at a rate of 35 bps. The maturity date of an extension of credit under the PPPLF will equal the maturity date of the PPP loan pledged to secure the extension of credit. Importantly, PPP loans will be assigned a weight of zero percent under the risk-based capital rules. Federal Banking Regulators also issued an interim final rule that will allow financial institutions to neutralize the effect of PPP loans financed under the PPPLF on regulatory capital ratios. This relief applies to both risk-based and leverage capital ratios, including the Community Bank Leverage Ratio. The capital relief is effective immediately.
These efforts by the Fed and Federal Banking Regulators should speed up the flow of funds to small businesses and assuage fears from financial institutions concerning potential liquidity pressure and capital constraints in connection with extending financing under the PPP.
Fixed-Rate DCPC Pools
- Fixed-rate SBA DCPC and SBIC’s offer superior convexity profiles to most residential MBS alternatives, while offering comparable yields and spreads.
- Current yield spreads on newer and seasoned SBA DCPCs have widened over the last month and are pricing at approximately 100 bps or wider to Treasurys (I-curve).
- The April fixed-rate SBA DCPC auction last Thursday included 20-year and 25-year maturities.
- Total issuance in the April auction of $421.2M was the highest level of issuance since July 2013. Issuance in April increased $41.6M (+11.0%) compared to March issuance of $379.6M. Issuance in the 25-year term totaled $279.4M in April, while the 20-year term totaled $141.8M.
- Yield spreads widened in the April auction and are significantly wider than the twelve-month average for all maturity terms. Spreads widened 34 bps month over month for both maturity terms (102 bps yield spread for the 25-year term and 89 bps for the 20-year term).
Fixed-Rate SBIC Debentures
- Current yield spreads on newer and seasoned SBICs have widened over the last month and are pricing at approximately 120 bps or wider to Treasurys (I-curve).
- The semi-annual SBIC auction priced last month at historically wide spreads (131 bps) detailed in the chart below.
Floating-Rate 7(a) Pools
- SBA floating-rate pools currently offer attractive yield opportunities compared to 3-month T-Bills, which had traded at zero to slightly negative yields the last two weeks of March, but yields moved higher the last two weeks into positive territory (27 bps this morning).
- SBA 7(a) prepayment speed commentary for the month of April will be released later this week.
- It is critically important to evaluate pools at a wide variety of speeds and using a prepayment vector. Our Performance Profile includes an analysis of your 7(a) pools layered against a historical prepayment vector. Please let your Representative know if you would like to run a Performance Profile.
Dan Stimpson, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP