November 22, 2021
Fixed-Rate SBA DCPCs (SBAP)
- Investor interest in fixed-rate SBA DCPCs 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 25 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. Auction issuance increased 32% month over month and 157% year over year.
- The current yield spread of 19 bps in new-issue SBA DCPCs to Treasurys tightened 1 bp last week. Spreads are 1 bp wider month over month and have tightened 10 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.
November Fixed-Rate SBA DCPC Auction (SBAP 2021-20K and SBAP 2021-25K)
- The November fixed-rate SBA DCPC auction included 10-year, 20-year, and 25-year maturities.
- Debenture rates rose 1 bp to 1.75% (25yr) and 1.55% (20yr) in the auction. Debenture rates are 28 bps (25yr) and 22 bps (20yr) above their twelve-month average.
- Total issuance of $631.1M increased $151.4M (+31.6%) from the prior month.
- The 25-year represented 82.0% of total issuance in the auction.
- Debenture rates to Treasury spreads widened 7 bps month over month for the 25-year and 20-year terms (25 bps spread for the 25-year and 5 bps for the 20-year). Spreads have widened approximately 25 bps from the historically tight levels in the June auction.
- Spreads are currently wider than their respective twelve-month average (9 bp wider for the 25-year and 3 bps wider for the 20-year).
Floating-Rate SBA 7(a) Pools
- SBA 7(a) prepay commentary: Prepayment speeds on both equipment and real-estate loan pools increased for the seventh time in eight months. These are the fastest speeds seen since March 2020 and both pool types are nearing their respective pre-pandemic levels.
- Equipment loan pools’ prepayments increased from 13.5 to 15.4 CPR, with almost all vintages increasing as well. Prepayments on real-estate loan pools increased from 15.0 to 17.1 CPR, though results were more mixed 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