March 30, 2020
The U.S. Senate and the House of Representatives passed the CARES Act and President Trump signed it into law last week. There are provisions within the Act focused on small business lending and USDA farm lending programs summarized below.
Guaranteed Lending to Sustain Small Business Employment
- The Act provides $350 billion of small business “paycheck protection” loans through the SBA 7(a) program. Eligible borrowers include COVID-19-affected businesses with fewer than 500 employees, and the maximum loan size is $10 million. Loan payments are deferred for six months.
- Loan proceeds used for certain purposes are forgiven and reimbursed to the lender by SBA. These purposes include up to 8 weeks of: payroll, mortgage interest, rent, and utilities. Loan underwriting terms are relaxed and loan fees are waived. The portion of the loan that is not forgiven has a term of 10 years and an interest rate not to exceed 4 percent.
- The guarantee level is 100 percent through year-end 2020. The program will be available to all current 7(a) lenders as well as lenders that do not currently participate in the 7(a) program according to criteria to be established by the Secretary of the Treasury.
- The Act permanently waives the new SBA affiliation rules that arbitrarily disqualify certain franchise and other small businesses from SBA lending.
Funding USDA Commodity Credit Corporation Support for Livestock and Specialty Crop Producers
- The bill provides $14 billion to replenish USDA’s Commodity Credit Corporation (CCC) to fund farm programs. It provides a separate infusion of $9.5 billion into the CCC for livestock, dairy, and specialty crop producers. Additional rural development funds are provided.
Fixed-Rate SBIC Debentures
- The semi-annual SBIC auction priced two weeks ago at historically wide spreads.
- 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 110 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 90 bps or wider to Treasurys (I-curve).
Floating-Rate 7(a) Pools
- SBA floating-rate pools currently offer attractive yield opportunities compared to 3-month T-Bills, which traded at zero to slightly negative yields the last two weeks.
- 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