June 29, 2020
Fixed-Rate DCPC Pools
- Supply in the secondary market for DCPC product has been light; new issuance in the market from the monthly auction next week should benefit SBAP liquidity.
- The July fixed-rate SBA DCPC auction next week, which includes 10-year, 20-year, and 25-year maturities, is expected to draw strong investor interest as SBA DCPCs and SBICs offer superior convexity profiles to most residential MBS alternatives, while offering comparable yields and spreads.
- Current yield spreads in SBA DCPCs were unchanged last week at 70 bps over Treasurys. Spreads have tightened 25 bps over the last month, but spreads are 8 and 7 bps wider YTD and YoY, respectively.
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.
Summary of Paycheck Protection Program (data as of June 27, 2020)
- The last day for small businesses to apply for PPP loans is June 30, 2020.
- Through June 27th, $518.86 billion in PPP loans have been approved by the SBA totaling 4.80 million small business loans through 5,458 participating lenders. The average size of PPP loans is $108,136 and the amount of PPP funding remaining is $134.45 billion.
Dan Stimpson, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP