June 15, 2020
Fixed-Rate DCPC Pools
- The June auction held last Thursday drew strong investor interest as DCPCs offer superior convexity profiles to most residential MBS alternatives, while offering comparable yields and spreads.
- Supply in the secondary market for DCPC product has been light; however, new issuance in the market from the monthly auction last week benefited SBAP liquidity.
- Current yield spreads in SBA DCPCs tightened 5 bps last week to 80 bps over Treasurys. Spreads have tightened 20 bps over the last month, but spreads remain wide compared to historical levels.
June Fixed-Rate DCPC Auction
- The June auction included 20-year and 25-year maturities.
- Total issuance in the monthly auction of $493.7M increased $83.7M (+20.4%) from the prior month, which was the highest level of issuance since March 2013. The 25-year term represented 67% of total issuance.
- Issuance is expected to remain high driven by historically low borrowing rates and the 6-months of loan payments provided by SBA on existing loans and new loans fully disbursed between March 27 and September 27.
- Borrowers are benefiting from low rates, locking in the lowest debenture rates in the 504 program’s history.
- Yield spreads tightened but remain a couple of basis points wider than the twelve-month average.
- Spreads tightened 14 bps month over month for both maturity terms (67 bps yield spread for the 25-year term and 54 bps for the 20-year term).
Floating-Rate 7(a) Pools
- SBA 7(a) prepayment speeds for the month of June experienced the largest month-over-month drop in years and it is likely that this summer season will be a historically low prepayment period. Equipment loan pools dropped from 12.4 to 5.4 CPR, with every vintage experiencing declines. Real-Estate loan pools decreased for the fifth straight month, going from 12.5 to 5.6.
- 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.
The Paycheck Protection Program (PPP) Flexibility Act
President Trump signed the PPP Flexibility Act into law June 5th allowing businesses more leeway in using the funds obtained through the SBA’s PPP, including the following changes to the Program:
- Allows businesses to spend more on non-payroll costs, up to 40% instead of the previous 25% limit
- Repayment term extended from 2 years to 5 years
- 8-week period for spending the funds extended to 24-weeks
- Covered period for rehiring workers extended from June 30 to December 31, 2020
Summary of Paycheck Protection Program (data as of June 12, 2020)
Through June 12th, $512.27 billion in PPP loans have been approved by the SBA totaling 4.58 million small business loans through 5,457 participating lenders. The average size of PPP loans is $111,938 and the amount of PPP funding remaining is $129.75 billion.
Dan Stimpson, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP