March 8, 2021
Fixed-Rate SBA DCPCs – March Auction This Week; SBIC Semi-Annual Auction Mid-March
- The March fixed-rate SBA DCPC auction this week and the SBIC semi-annual auction, expected as early as next week or the following week, should see strong investor interest as SBA DCPCs and SBICs offer superior convexity profiles to most residential MBS alternatives. Pricing in the February DCPC auction resulted in 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 over the next several weeks should benefit liquidity in the SBA market.
- The current yield spread of 40 bps in new issue SBA DCPCs to Treasurys was unchanged last week. Spreads have widened 5 bps month over month and 11 bps in 2021.
- 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.
February Fixed-Rate SBA DCPC Auction (SBAP 2021-20B 1 and SBAP 2021-25B 1)
- The February fixed-rate SBA DCPC auction included 20-year and 25-year maturities.
- Debenture rates are at their highest levels since June 2020 and are only 4 bps below the twelve-month average.
- Total issuance in the February auction of $415.2M increased $121.6M (+41.4%) from the prior month.
- The 25-year term represented 85.5% of total issuance in the February auction.
- Spreads tightened 1 bp month over month for 25-year and 20-year terms, respectively (19 bps yield spread for the 25-year term and 9 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.
Fixed-Rate SBIC Debentures – Semi-Annual Auction Mid-March
- The SBIC semi-annual auction, expected as early as next week or the following week, should see strong investor interest.
- Yield spreads in the September 2020 SBIC auction tightened considerably to 36 bps over the 10-year Treasury.
- SBIC borrowers benefited from historically low rates in the prior auction, locking in the lowest trust certificate rate in the program’s history at 1.03%; however, total issuance of $685.45M was the lowest since September 2013.
Floating-Rate SBA 7(a) Pools
- SBA 7(a) prepay commentary for March will be released later this week.
- 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