March 15, 2021
Fixed-Rate SBIC Debentures – Semi-Annual Auction This Week or Next
- The SBIC semi-annual auction, expected as early as this week or next week, should see strong investor interest as pre-order activity has been robust.
- SBICs have a maturity date of 10 years and do not amortize.
- SBICs offer superior convexity profiles to most residential MBS alternatives and typically offer a yield pickup over agency bullets.
- Yield spreads in the September 2020 SBIC auction tightened considerably to 36 bps over the 10-year Treasury.
- SBIC borrowers benefited from historically low rates in the prior auction, locking in the lowest trust certificate rate in the program’s history at 1.03%; however, total issuance of $685.45M was the lowest since September 2013.
Fixed-Rate SBA DCPCs – March Auction Last Week
- The March fixed-rate SBA DCPC auction last week saw strong investor interest. The March 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 auctions should benefit liquidity in the SBA market.
- The current yield spread of 35 bps in new issue SBA DCPCs to Treasurys tightened 5 bps last week. Spreads are unchanged month over month and have widened 6 bps in 2021.
- 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.
March Fixed-Rate SBA DCPC Auction (SBAP 2021-20C 1 and SBAP 2021-25C 1)
- The March fixed-rate SBA DCPC auction included 10-year, 20-year, and 25-year maturities.
- Debenture rates are at their highest levels since April 2020 and are 30 bps above the twelve-month average.
- Total issuance in the March auction of $354.5M declined $60.8M (-14.6%) from the prior month.
- The 25-year term represented 81.2% of total issuance in the March auction.
- Debenture rates to Treasury spreads tightened 10 bps month over month for the 25-year and 11 bps for the 20-year term (9 bps spread for the 25-year term and -2 bps for the 20-year term).
- Spreads are currently significantly tighter than the twelve-month average and are trading at the tightest spreads historically for both maturity terms.
Floating-Rate SBA 7(a) Pools
- SBA 7(a) prepay commentary: Prepayment speeds for March, reflecting activity in February, declined for the third time in four months, reflecting the continued uncertainty among small business owners and low default rates for small businesses. Equipment loan pools’ prepayments decreased from 10.7 to 8.6 CPR; a trend reflected in almost every vintage. Speeds on real-estate loan pools also slowed, going from 10.5 to 7.2 CPR, though individual results were mixed across vintages.
- 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