March 16, 2020
Fixed-Rate SBIC Debentures
- The semi-annual SBIC auction is expected to price today. SBIC debentures are issued in March and September.
- The SBIC debenture rate is set based off of a market-driven premium to 10-year Treasury Notes.
- Initial price indications for the March auction (SBIC 2020-10A 1) at 10 CDR:
- 1.95% Yield | 6.45Yr Average Life | Approx. 131 bps Spread to Treasuries
- SBIC debentures and fixed-rate SBA DCPC pools remain attractive as they offer superior convexity profiles to most residential MBS alternatives, while offering comparable yields and spreads.
- Current yield spreads on newer and seasoned SBICs have widened over the last several weeks and are pricing at approximately 80 bps or wider to Treasuries (I-curve).
- SBIC auction history is included below.
Fixed-Rate DCPC Pools
- The March fixed-rate SBA DCPC auction included 10-year, 20-year, and 25-year maturities.
- For the eighth consecutive month issuance in the 25-year term exceeded the 20-year term. Issuance in the 25-year term totaled $256.7M in March, while the 20-year term totaled $111.4M. Total issuance in the March auction of $379.9M increased $99.7M (+35.6%) compared to February issuance of $279.9M.
- Yield spreads widened in the March auction and are wider than the twelve-month average for all maturity terms. Spreads widened 14 bps month over month for the longer terms (68 bps yield spread for the 25-year term and 55 bps for the 20-year term).
- Current yield spreads on newer and seasoned SBA DCPCs have widened over the last several weeks and are pricing at approximately 80 bps or wider to Treasuries (I-curve).
Floating-Rate 7(a) Pools
- SBA floating-rate pools with uncapped quarterly resets indexed to Prime experienced a decline in activity and lower levels of supply the last several weeks as the Fed cut rates and markets were increasingly pricing in additional rate cuts. The Fed cut rates in emergency meetings 50 bps on March 3rd and another 100 bps yesterday, lowering the Fed Funds target rate range to 0.00% – 0.25%.
- SBA 7(a) prepayment speeds decreased slightly for the month of March, due in part to February only having 19 business days. Equipment loan pools experienced a small drop overall, going from 17.6 to 17.0 CPR, with individual vintages experiencing similarly small changes. Real-Estate loan pools decreased from 18.9 to 18.4 CPR, though results were more mixed amongst 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.
Government Guaranteed Loan Trading
Government-guaranteed USDA agricultural FSA loan activity has been slow the last several weeks as supply remains a challenge, while demand for these loans remains high. As has been the case for some time, supply and not demand limits loan trading volumes.
Dan Stimpson, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP