April 22, 2019
The USDA recently announced the implementation status of the 2018 Farm Bill signed into law on December 20th, 2018. Limits on USDA loans were bumped up to increase the amount producers can borrow through direct and guaranteed FSA loan programs.
Government Guaranteed Loan Trading
Highlights of changes implemented recently by the USDA from the 2018 Farm Bill:
Increased Loan Limits: FSA announced that eligible agricultural producers have access to higher loan amounts, to better provide them with the credit needed during this period of lower market prices and numerous natural disasters.
- The Direct Operating Loan limit increased to $400,000, and the Guaranteed Operating Loan limit increased to $1.75 million.
- The Direct Farm Ownership Loan limit increased to $600,000, and the Guaranteed Farm Ownership Loan limit increased to $1.75 million.
Modified Micro Loan Limits: FSA implemented a change to allow agricultural producers to receive both a $50,000 Direct Operating Microloan and a $50,000 Direct Farm Ownership Microloan. Previously, agricultural producers were limited to a combined total of $50,000.
Increase in Percent of Guarantee for Beginning and Socially Disadvantaged Farmers: FSA increased the percent for new guaranteed loans to any beginning or socially disadvantaged agricultural producer to 95 percent.
Fixed-Rate DCPC Pools
Fixed-rate DCPC pools and SBIC fixed-rate debentures remain attractive as they offer superior convexity profiles to most residential MBS alternatives, while offering comparable yields and spreads.
- The April fixed-rate DCPC auction included 20 and 25yr maturities.
- Issuance in the April auction improved compared to the prior month.
- Issuance totaled $369.3M in April and $275.6M in March, an increase of 34% MoM.
- Issuance for the 20yr term totaled $199.3M in April, while the 25yr term increased to $170.0M; the largest issuance for the 25yr term since its first issuance in July 2018.
- Yield spreads versus Treasuries tightened 5 to 6bps in the April auction compared to the prior month for the 20yr and 25yr terms.
- Yield spreads are currently below the twelve-month average for the 20 and 25yr terms.
Floating-Rate 7(a) Pools
- SBA floating-rate pools trading to financial institutions last week primarily included real estate pools at par pricing.
- Pricing levels on SBA floating pools with uncapped quarterly resets indexed to Prime offer attractive yield opportunities versus interest bearing cash and fed funds returns and also when compared to other floating rate bond alternatives.
- With 90-day Treasuries trading at a yield of 2.42% many floating-rate bond options currently offer similar and even higher yields than longer duration fixed-rate bonds, driven by a flat yield curve between 3-month and 10-year Treasuries.
- SBA prepayment speeds for SBA 7(a) pools paid at faster speeds in April than in the prior month. Equipment pools broadly increased from 14.5 to 18.8 CPR. Real-Estate speeds came in 1 CPR faster at 16.6 CPR after they were virtually flat last month. The overall trend since peaking last November has been a slowdown in CPRs for both Equipment and Real-Estate pools.
Dan Stimpson, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP