March 22, 2021
Fixed-Rate SBIC Debentures – Semi-Annual Auction Last Week
- The SBIC semi-annual auction last week saw strong investor interest. The March SBIC auction priced at historically tight spreads.
- SBICs and SBAPs offer superior convexity profiles to most residential MBS alternatives and typically offer a yield pickup over agency bullets.
- Yield spreads in the March 2021 SBIC auction tightened considerably to 5 bps over the 10-year Treasury. The trust certificate rate increased 64 bps from 1.03% to 1.67%.
- Issuance in the March 2021 auction increased $410.2 million (+59.8%) to $1.096 billion.
Fixed-Rate SBA DCPCs (SBAP)
- The March fixed-rate SBA DCPC auction 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 25 bps in new issue SBA DCPCs to Treasurys tightened 10 bps last week. Spreads have tightened 10 bps month over month and have tightened 4 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.
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