February 25, 2019
The temporary disruption in SBA new issuance due to the recent government shutdown has resulted in low secondary inventory levels, while investor demand in the SBA sector remained high last week in floating-rate and fixed-rate SBA pools.
Floating-Rate 7(a) Pools
- Pricing levels on SBA floating pools with uncapped quarterly resets indexed to Prime offer attractive yield opportunities versus interest bearing cash and fed funds returns and also when compared to other floating rate bond alternatives.
- With 90-day Treasuries trading at a yield of 2.44%, this represents an opportunity to buy par-priced SBA floater pools at a spread of approximately 50bps over 3 Month T-Bills.
- Ten-year WAM equipment-loan pools should attract investor interest due to the cash flows from shorter amortization schedules: many competing floating rate alternatives offer minimal or no principal cash flows for a significant interval after issuance.
Fixed-Rate DCPC Pools
- Fixed-rate DCPC pools and SBIC fixed-rate debentures remain attractive as they offer superior convexity profiles to most residential MBS alternatives, while offering comparable yields and spreads.
- The February fixed-rate DCPC auction included 20 and 25yr maturities.
- The impact of the recent government shutdown was evident in the February fixed-rate DCPC auction as issuance was down significantly from the January auction.
- Issuance totaled $195.2M in February and $342.5M in January, a decline of 43% MoM.
- Issuance for the 20yr term continued its 6-month decline totaling $130.0M in February, while the 25yr term decreased to $65.2M.
- Yield spreads versus Treasuries tightened in the February auction compared to the prior month for the 20yr and 25yr terms.
- Yield spreads are currently within one basis point of the average for the prior 12 months.
- The 59bp spread over Treasuries for the 20yr DCPC auction in February tightened 7bps from the prior month, while the 25yr term also tightened 7bps to 78bps.
SBA Prepayment Speeds
- SBA prepayment speeds in February for both Equipment and Real-Estate SBA 7(a) pools declined after increasing the prior month.
- Equipment pool prepayment speeds decreased from 15.09 to 13.62 CPR in February. The vast majority of the decline in speeds can be attributed to the nearly 6 CPR decline in the 2017 vintage.
- Real-Estate prepayments by vintage were more uniform. Every vintage of consequence (save 2018 and 2014) posted declines. The largest decline in speeds MoM was the 2015 vintage, as the CPR declined by almost half compared to the previous month.
- It is critically important to evaluate pools at a wide variety of speeds and also 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.
Government Guaranteed Loan Trading
Government-guaranteed USDA agricultural loans and SBA loans traded to financial institutions last week, but limited availability of supply has impacted activity recently. As has been the case for some time, supply and not demand limits loan trading volumes. The temporary disruption in new issuance has resulted in light secondary inventory levels for not only SBA investment pools, but guaranteed loans as well.
Dan Stimpson, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP