June 28, 2021
Fixed-Rate SBA DCPCs (SBAP) – July Auction Next Week
- The July fixed-rate SBA DCPC auction next week should see strong investor interest as SBA DCPCs and SBICs offer superior convexity profiles to most residential MBS alternatives. The June DCPC auction priced at historically tight spreads.
- Supply in the secondary market for SBA fixed rate product has not kept up with demand; new issuance in the market from the auction should benefit liquidity in the SBA market.
- The current yield spread of 12 bps in new issue SBA DCPCs to Treasurys widened 2 bps last week. Spreads are 3 bps tighter month over month and have tightened 17 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.
June Fixed-Rate SBA DCPC Auction (SBAP 2021-20F and SBAP 2021-25F)
- The June fixed-rate SBA DCPC auction included 20-year and 25-year maturities.
- Debenture rates fell for the second consecutive month in June from the highs in April 2021; however, debenture rates are still 16 bps (25yr) and 9 bps (20yr) above their twelve-month average.
- Total issuance in the June auction of $565.5M increased $83.2M (+17.3%) from the prior month.
- The 25-year term represented 87.5% of total issuance in the June auction.
- Debenture rates to Treasury spreads widened 2 bps month over month for the 25-year term but spreads tightened 1 bps for the 20-year term (-2 bps spread for the 25-year term and -20 bps for the 20-year term).
- Spreads are currently significantly tighter than their twelve-month average and are trading at or near the tightest spreads historically for both maturity terms.
Floating-Rate SBA 7(a) Pools
- SBA 7(a) prepay commentary was released last week. Prepayment speeds on both equipment and real-estate loan pools increased for the month of June as expected. Equipment loan pools’ prepayments increased from 11.4 to 12.1 CPR. Speeds on real-estate loan pools rose as well, increasing from 10.8 to 11.8 CPR. We may see prepayments begin to follow seasonal trends again as they generally pick up in the warmer months and begin to slow as we head into 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