March 28, 2022
Fixed-Rate SBA DCPCs (SBAP)
- Investor interest in the fixed-rate SBA DCPC auction next week is expected to remain strong as 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. Debenture rates increased and yield spreads widened over 30 bps month over month to their highest levels in over a year in the March fixed-rate SBA DCPC auction.
- The current yield spread of 57 bps in new issue SBA DCPCs to Treasurys was unchanged last week. Spreads are 23 bps wider month over month and 30 bps wider year to date. Spreads are 34 bps wider than the 1-year average of 23 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).
Fixed-Rate SBIC Debentures – Semi-Annual Auction
- The SBIC semi-annual auction held two weeks ago 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.
Floating-Rate SBA 7(a) Pools
- Prepayment 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