April 20, 2020
PPP Runs Out of Funds; Congress Negotiating Additional Funding
The Paycheck Protection Program (“PPP”) authorized up to $349 billion in SBA guaranteed forgivable loans to small businesses to pay their employees during the COVID-19 crisis. The PPP funds were exhausted last week. According to a report from the SBA, 1.661 million PPP loans were made by 4,975 lenders. The average PPP loan size was $206K.
Congress is negotiating a $370 billion deal that would reportedly allocate $310 billion more into the Paycheck Protection Program, setting aside $60 billion of that sum for rural and minority groups. Another $60 billion would go to the Economic Injury Disaster Loan program, a separate program offering loans for small businesses administered by the SBA.
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 alleviate fears from financial institutions concerning potential liquidity pressure and capital constraints in connection with extending financing under the PPP.
Floating-Rate 7(a) Pools
- SBA 7(a) prepayment speeds for the month of April were released last week. The effects of nationwide social distancing measures were reflected in prepayments, as speeds on both Equipment and Real-Estate loan pools experienced widespread decreases for the month of April. Equipment loan pools dropped from 17.0 to 12.0 CPR, with every vintage experiencing a decrease as well. Real-Estate loan pools went down from 18.4 to 13.4, as all but two individual vintages experienced reductions in speeds.
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 SBA DCPCs widened last week and have widened over the last month, pricing at approximately 109 bps or wider to Treasurys (I-curve). Seasoned SBA DCPC spreads are wider than new-production and spreads range from 117 bps to 135bps and higher (150 bp spread on the more seasoned SBAPs).
- The April fixed-rate SBA DCPC auction held on April 9th 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.
Dan Stimpson, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP