August 23, 2021
Fixed-Rate SBA DCPCs (SBAP)
- Investor interest in the August fixed-rate SBA DCPC auction remained strong as SBA DCPCs and SBICs offer superior convexity profiles to most residential MBS alternatives. The DCPC auction has priced at historically tight spreads for much of this year; however, spreads have widened over the last two months.
- Supply in the secondary market for SBA fixed rate product has not kept up with demand. Issuance has trended higher over the past ten months from the lows in October 2020. Auction issuance declined month over month.
- The current yield spread of 25 bps in new issue SBA DCPCs to Treasurys was unchanged last week. Spreads are 11 bps wider month over month but have tightened 4 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.
August Fixed-Rate SBA DCPC Auction (SBAP 2021-20H and SBAP 2021-25H)
- The August fixed-rate SBA DCPC auction included 20-year and 25-year maturities.
- Debenture rates rose 5 bps in the August auction, reversing a three-month downward trend from the recent highs in April 2021. Debenture rates are 9 bps (25yr) and 5 bps (20yr) above their twelve-month average.
- Total issuance in the August auction of $464.8M fell $27.1M (5.5%) from the prior month.
- The 25-year term represented 85.3% of total issuance in the August auction.
- Debenture rates to Treasury spreads widened 14 bps month over month for the 25-year and 20-year terms (25 bps spread for the 25-year term and 7 bps for the 20-year term). Spreads have widened 27 bps over the last two months from the historically tight levels in the May and June auctions.
- Spreads are currently near than their respective twelve-month average for both maturity terms (4 bps wider for the 25-year term and 2 bps tighter for the 20-year term).
Floating-Rate SBA 7(a) Pools
- SBA 7(a) prepay commentary: Prepayment speeds for both equipment and real-estate loan pools increased for the fifth straight month. A recently-effected rule change by the SBA regarding debt refinancing may prevent speeds from experiencing the same dip they historically experience in the fall and winter.
- 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