March 21, 2022
Fixed-Rate SBIC Debentures – Semi-Annual Auction
- The SBIC semi-annual auction last week saw strong investor interest as the trust certificate rate and spreads widened above their respective historical averages dating back to 2015.
- 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 March 2022 SBIC auction widened considerably to 77 bps over the 10-year Treasury. The trust certificate rate increased 164 bps from 1.30% to 2.94%, which is the highest rate since March 2019 . Issuance in the March 2022 auction increased $717.50 million (+52.7%) to $2.077.85 billion.
Fixed-Rate SBA DCPCs (SBAP)
- Debenture rates increased and yield spreads widened over 30 bps month over month in the fixed-rate SBA DCPC auction.
- SBA DCPCs and SBICs offer superior convexity profiles to most residential MBS alternatives.
- The DCPC auction priced at historically tight spreads for much of 2021; however, spreads have widened approximately 75 bps since June 2021.
- The current yield spread of 57 bps in new issue SBA DCPCs to Treasurys widened 2 bps last week. Spreads are 25 bps wider month over month and 30 bps wider year to date. Spreads are 35 bps wider than the 1-year average of 22 bps.
March Fixed-Rate SBA DCPC Auction (SBAP 2022-20C and SBAP 2022-25C)
- The March fixed-rate SBA DCPC auction included 10-year, 20-year, and 25-year maturities.
- Debenture rates rose over 30 bps to 2.75% (25yr) and 2.53% (20yr) in the auction. Debenture rates are 96 bps (25yr) and 92 bps (20yr) above their respective twelve-month average.
- Total issuance of $611.2M increased $87.9M (16.8%) from the prior month.
- The 25-year represented 84.75% of total issuance in the auction.
- Debenture rates to Treasury spreads widened 32 bps month over month for the 25-year term and 30 bps for the 20-year term (75 bps spread for the 25-year and 53 bps for the 20-year).
- Spreads have widened approximately 75 bps from the historically tight levels in the June 2021 auction.
- Spreads are wider than their respective twelve-month average (52 bps wider for the 25-year and 48 bps wider for the 20-year).
Floating-Rate SBA 7(a) Pools
- Prepayment speed commentary on SBA 7(a) floating rate pools was released last week.
- Speeds on both equipment and real-estate loan pools decreased in February. Equipment loan pools’ prepayments slowed from 21.5 to 18.3 CPR, with most individual vintages experiencing decreases. Speeds on real-estate loan pools declined from 18.4 to 14.7 CPR, which was also the case for most pools when viewed on a vintage-by-vintage basis.
- 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