March 23, 2020
Fixed-Rate SBIC Debentures
- The semi-annual SBIC auction priced last Monday at historically wide spreads.
- SBIC auctions are held and debentures are issued in March and September.
- The trust certificate coupon rate is set based off of a market-driven premium to 10-year Treasury Notes.
- 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 100 bps or wider to Treasurys (I-curve).
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 86 bps or wider to Treasurys (I-curve).
Floating-Rate 7(a) Pools
- SBA floating-rate pools with uncapped quarterly resets indexed to Prime have 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 has cut rates a total of 150bps in two emergency meetings in March, lowering the Fed Funds target rate range to 0.00% – 0.25%.
- SBA floating-rate pools currently offer attractive yield opportunities compared to 3-month T-Bills, which traded at zero to slightly negative yields last week.
- 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