April 27, 2020
$484 Billion Stimulus Package includes $310 Billion for Paycheck Protection Program (PPP) Loans
President Trump signed another relief bill into law on April 24th. The $484 billion relief package replenishes funds for small business PPP loans ($310B), includes SBA disaster loans ($60B), provides funding for hospitals ($75B) and COVID-19 testing ($25B). The SBA will resume accepting PPP applications from participating lenders on Monday, April 27, 2020 at 10:30am EDT.
Treasury and the SBA Tighten PPP Eligibility
On April 23rd Treasury and the Small Business Administration (SBA) tightened the requirements for businesses to get those funds. Companies must certify in good faith that the “loan request is necessary” due to a lack of “other sources of liquidity.” “It is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith,” the agency said of companies’ need to vouch for the urgent need for funding. Any company that already received PPP funds but shouldn’t have based on these requirements can return the money by May 7 without the risk of penalty.
On April 23rd the Federal Housing Finance Agency announced that Federal Home Loan Banks can accept PPP loans as collateral when making advances to their members.
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.
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.
Fixed-rate SBA DCPC and SBIC’s offer superior convexity profiles to most residential MBS alternatives, while offering comparable yields and spreads.
Fixed-Rate DCPC Pools
- Yield spreads on SBA DCPCs have widened over the last month, pricing at approximately 120 bps or wider to Treasurys (I-curve).
- 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.
- 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
- 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), significantly wider than the average spread of 53 bps from March 2014 to March 2020.
Floating-Rate 7(a) Pools
- SBA 7(a) prepayment speeds for the month of April were released recently and 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.
Dan Stimpson, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP