November 1, 2021
Fixed-Rate SBA DCPCs (SBAP)
- Investor interest in fixed-rate SBA product remains strong as SBA DCPCs and SBICs offer superior convexity profiles to most residential MBS alternatives. The DCPC auction has priced at historically tight spreads for much of this year; however, spreads have widened approximately 20 bps since June.
- Supply in the secondary market for SBA fixed rate product has not kept up with demand. Issuance has trended higher over the past twelve months from the lows in October 2020.
- The current yield spread of 18 bps in new issue SBA DCPCs to Treasurys was unchanged last week. Spreads are 6 bps tighter month over month and have tightened 11 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.
October Fixed-Rate SBA DCPC Auction (SBAP 2021-20J and SBAP 2021-25J)
- The October fixed-rate SBA DCPC auction included 20-year and 25-year maturities.
- Debenture rates rose 18 bps to 1.74% (25yr) and 16 bps to 1.54% (20yr) in the auction. Debenture rates are 31 bps (25yr) and 25 bps (20yr) above their twelve-month average.
- Total issuance of $479.7M decreased $155.4M (-24.5%) from the prior month.
- The 25-year represented 85.1% of total issuance in the auction.
- Debenture rates to Treasury spreads tightened 5 bps month over month for the 25-year and tightened 7 bps for the 20-year (18 bps spread for the 25-year and -2 bps for the 20-year). Spreads have widened approximately 20 bps from the historically tight levels in the June auction.
- Spreads are currently near their respective twelve-month average for the 25-year (1 bp wider for the 25-year and 6 bps tighter for the 20-year).
Floating-Rate SBA 7(a) Pools
- SBA 7(a) prepay commentary: Prepayment speeds on equipment loan pools decreased for the first time since March, while those for real-estate loan pools rose for the sixth time in seven months.
- Equipment loan pool prepayments decreased from 14.5 to 13.5 CPR and prepayments on real-estate loan pools increased from 13.4 to 15.0 CPR.
- 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