February 16, 2021
Fixed-Rate SBA DCPCs
- The February fixed-rate SBA DCPC auction last Thursday saw strong investor interest as SBA DCPCs and SBICs offer superior convexity profiles to most residential MBS alternatives. Pricing in the February auction resulted in historically tight spreads.
- 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.
- The current yield spread of 35 bps in new issue SBA DCPCs to Treasurys was unchanged last week. Spreads have widened 7 bps month over month but have tightened 6 bps in 2021.
- 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.
February Fixed-Rate SBA DCPC Auction (SBAP 2021-20B 1 and SBAP 2021-25B 1)
- The February fixed-rate SBA DCPC auction included 20-year and 25-year maturities.
- Debenture rates are at their highest levels since June 2020 and are only 4 bps below the twelve-month average.
- Total issuance in the February auction of $415.2M increased $121.6M (+41.4%) from the prior month.
- The 25-year term represented 85.5% of total issuance in the February auction.
- Spreads tightened 1 bp month over month for 25-year and 20-year terms, respectively (19 bps yield spread for the 25-year term and 9 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: Prepayment Speeds Decline
- SBA 7(a) prepay commentary: February prepayment speeds declined in SBA equipment and real estate pools after ticking higher in January. Equipment loan pools’ prepayments decreased from 13.8 to 10.7 CPR; a trend reflected in almost every vintage. Real-estate loan pools fell from 12.3 to 10.5 CPR, though individual results were mixed across 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