August 10, 2020
Fixed-Rate SBA DCPC SBAP Pools
- Supply in the secondary market for DCPC product has not kept up with demand; new issuance in the market from the monthly auction last week benefited SBAP liquidity.
- Current yield spreads in new issue SBA DCPCs to Treasurys tightened 12 bps last week to 46 bps. Spreads have tightened 14 bps over the last month and are 15 to 16 bps tighter than year-end and prior year spreads.
- 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.
August Fixed-Rate SBA DCPC Auction (SBAP 2020-20H 1 and SBAP 2020-25H 1)
- The August fixed-rate SBA DCPC auction last week, which included 20-year and 25-year maturities, drew strong investor interest as SBA DCPCs and SBICs offer superior convexity profiles to most residential MBS alternatives, while offering comparable yields and spreads.
- Total issuance in the monthly auction of $374.8M declined $22.5M (-5.7%) from the prior month. The 25-year term represented 72.8% of total issuance and the 20-year term represented 27.2% of total issuance.
- Borrowers are benefiting from historically low rates, locking in the lowest debenture rates in the 504 program’s history. Small businesses are also receiving 6-months of loan payments provided by SBA on existing loans and new loans fully disbursed between March 27 and September 27.
- Yield spreads were essentially unchanged in this month’s auction; however, spreads have tightened considerably over the last 4 months from the historically wide spreads in April. Spreads are currently tighter than the twelve-month average for 20-year and 25-year maturities.
- Spreads were 1 bp tighter to unchanged month over month for 25-year and 20-year terms, respectively (50 bps yield spread for the 25-year term and 39 bps for the 20-year term).
Floating-Rate 7(a) Pools
- SBA 7(a) prepayment speeds for the month of August will be released later this week. SBA prepayment speeds have been low during COVID-19 and are expected to remain low as long as fiscal stimulus and payment assistance programs are available to small businesses.
- 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.
PPP Loan Program Ends; Additional Small Business Aid Likely in the Next Round of Stimulus
- Paycheck Protection Program (PPP) loan applications ended on August 8th.
- While further stimulus for small business is under consideration in Congress, additional PPP programs are expected to be smaller and more restrictive than the first two rounds of PPP.
PPP Loan Forgiveness Begins
The SBA will be rolling out a PPP forgiveness platform to process PPP loan forgiveness applications beginning August 10.
- Borrowers can begin submitting the Loan Forgiveness Application to lender.
- The lender has 60 days to submit a decision to the SBA, using the SBA’s Payroll Protection Forgiveness Platform.
- The SBA has 90 days to review the forgiveness application and remit the forgiveness funds to the lender.
$521.386 billion in PPP loans have been approved by the SBA totaling 5.084 million small business loans through 5,459 participating lenders. The average size of PPP loans is $102,563 and the amount of PPP funding remaining is $128.23 billion.
Dan Stimpson, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP