April 6, 2020
The recently passed CARES Act created the SBA PPP to help struggling small businesses impacted by COVID-19 and appropriates $349 billion for this purpose. The PPP provides vital cash-flow assistance through 100 percent federally guaranteed loans to small businesses who maintain their payroll during the COVID-19 crisis. If the small business borrower maintains its payroll, the portion of the loan used for certain covered expenses including payroll, interest on mortgage obligations, rent, and utilities would be forgiven.
The PPP application process was first available on Friday April 3rd and has seen extremely strong demand from small businesses. While the PPP allows for the loans to be sold in the secondary market, we don’t expect these loans to be securitized due to the short maturity term of the loans (2 years) and low interest rate (1 percent).
Fixed-Rate DCPC Pools
- The April fixed-rate SBA DCPC auction this Thursday, which includes 20-year and 25-year maturities, is expected to draw strong investor interest as they 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).
Fixed-Rate SBIC Debentures
- The semi-annual SBIC auction priced three weeks ago at historically wide spreads.
- SBIC debentures remain attractive as they offer superior convexity profiles to most residential MBS alternatives, while offering comparable yields and spreads.
- 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).
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 last week into positive territory.
- 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