February 18, 2020
Floating-Rate 7(a) Pools
- SBA 7(a) prepayment speeds for the month of February declined for Equipment and Real-Estate pools. Equipment loan pools experienced a small drop overall, declining from 18.0 to 17.6 CPR, though results were mixed on a vintage-by-vintage basis. Real-Estate loan pools decreased from 23.5 to 18.9 CPR, with most individual vintages experiencing decreases of varying severity.
- 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.
- SBA floating-rate pools with uncapped quarterly resets indexed to Prime experienced a continued pickup in activity over the last month with the majority of the activity in higher coupon 10-year equipment pools priced at moderate premiums.
- SBA floating-rate pools currently offer attractive yield opportunities compared to 3-month T-Bills and Fed Funds and offer similar or higher yields than longer duration fixed-rate bonds, driven by the bond rally, spread tightening in other product sectors and flattening of the yield curve.
Fixed-Rate DCPC Pools
- The February fixed-rate SBA DCPC auction drew strong investor interest as many portfolio managers are considering strategies to extend duration and call structures to neutralize asset sensitive interest rate risk profiles and to protect against falling rate exposures.
- Fixed-rate SBA DCPC pools and SBIC debentures remain attractive as they offer superior convexity profiles to most residential MBS alternatives, while offering comparable yields and spreads.
- The February fixed-rate SBA DCPC auction included 20-year and 25-year maturities.
- For the seventh consecutive month issuance in the 25-year term exceeded the 20-year term. Issuance in the 25-year term totaled $192.8 in February, while the 20-year term totaled only $87.1M. Total issuance in the February auction of $279.9M declined $50.9M (-15.4%) compared to January issuance of $330.8M.
- Yield spreads remain tighter than the twelve-month average for the 20-year and 25-year terms. Spreads tightened 2 bps month over month; 54 bps yield spread for the 25-year term and 41 bps for the 20-year term.
- Current yield spreads on newer and seasoned SBA DCPCs and SBICs are pricing at approximately 54 bps or wider to Treasurys (I-curve).
Government Guaranteed Loan Trading
Government-guaranteed USDA agricultural FSA loan activity has been slow the last several weeks as supply remains a challenge, while demand for these loans remains high. As has been the case for some time, supply and not demand limits loan trading volumes.
Dan Stimpson, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP