April 26, 2021
Fixed-Rate SBA DCPCs (SBAP) – May Auction Next Week
- The May fixed-rate SBA DCPC auction next week should see strong investor interest as SBA DCPCs and SBICs offer superior convexity profiles to most residential MBS alternatives.
- Supply in the secondary market for SBA fixed-rate product has not kept up with demand; new issuance in the market from the auction should benefit liquidity in the SBA market.
- The DCPC auction in April and the semi-annual SBIC auction in March priced at historically tight spreads.
- The current yield spread of 15 bps in new issue SBA DCPCs to Treasurys was unchanged last week. Spreads have tightened 5 bps month over month and have tightened 14 bps year to date.
- Spreads in seasoned DCPCs and SBICs are wider than new issues, but premium risk is higher in seasoned products driven by higher debenture rates on older loans.
April Fixed-Rate SBA DCPC Auction (SBAP 2021-20D 1 and SBAP 2021-25D 1)
- The April fixed-rate SBA DCPC auction included 20-year and 25-year maturities.
- Debenture rates are at their highest levels since April 2020 and are 33 bps above the twelve-month average.
- Total issuance in the April auction of $442.4M increased $87.9M (+24.8%) from the prior month.
- The 25-year term represented 86.5% of total issuance in the April auction.
- Debenture rates to Treasury spreads tightened 7 bps month over month for the 25-year and 8 bps for the 20-year term (2 bps spread for the 25-year term and -10 bps for the 20-year term).
- Spreads are currently significantly tighter than the twelve-month average and are trading at the tightest spreads historically for both maturity terms.
Floating-Rate SBA 7(a) Pools
- SBA 7(a) prepay commentary: After prepayments declined for three of the previous four months, speeds reversed course for April. Growing optimism from small businesses, mixed with the historical trend of increased prepayments in the warmer months, may be an indication that speeds will continue to ramp in the coming months.
- Equipment loan pools’ prepayments saw a slight uptick, going from 8.6 to 8.7 CPR, though results were mixed among vintages. Speeds on real-estate loan pools increased as well, going from 7.2 to 9.1 CPR, which was reflected in most individual vintages.
- 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