May 17, 2021
Fixed-Rate SBA DCPCs (SBAP)
- The May fixed-rate SBA DCPC auction saw strong investor interest as SBA DCPCs and SBICs offer superior convexity profiles to most residential MBS alternatives. The May 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 auction benefited liquidity in the SBA market.
- The current yield spread of 12 bps in new issue SBA DCPCs to Treasurys tightened 3 bps last week. Spreads are also 3 bps tighter month over month and have tightened 17 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.
May Fixed-Rate SBA DCPC Auction (SBAP 2021-20E 1 and SBAP 2021-25E 1)
- The May fixed-rate SBA DCPC auction included 10-year, 20-year, and 25-year maturities.
- Debenture rates fell in May from the highest levels since April 2020; however, debenture rates are still 20 bps (25yr) and 17 bps (20yr) above their twelve-month average.
- Total issuance in the May auction of $482.2M increased $39.9M (+9.0%) from the prior month.
- The 25-year term represented 84.3% of total issuance in the May auction.
- Debenture rates to Treasury spreads tightened 6 bps month over month for the 25-year and 9 bps for the 20-year term (-4 bps spread for the 25-year term and -19 bps for the 20-year term).
- Spreads are currently significantly tighter than their twelve-month average and are trading at the tightest spreads historically for both maturity terms.
Floating-Rate SBA 7(a) Pools
- The SBA 7(a) prepay commentary released last week showed prepayments continued to speed up for the month of May, which should come as no surprise given the direction of COVID-19 vaccinations and restrictions along with general seasonal trends. Equipment loan pools’ prepayments rose from 8.7 to 11.4 CPR, an increase reflected on a vintage-by-vintage basis. Speeds on real-estate loan pools sped up as well, going from 9.1 to 10.8 CPR, this pick up could also be seen in most individual vintages. Given that prepayments historically pick up in the summer, last year notwithstanding, speeds may continue to rise over the next few months as they gear back towards seasonal norms.
- 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