November 30, 2020
Fixed-Rate SBA DCPCs
- The December fixed-rate SBA DCPC auction next week is expected to draw strong investor interest as SBA DCPCs and SBICs offer superior convexity profiles to most residential MBS alternatives, while offering comparable yields and spreads.
- Supply in the secondary market for DCPC product has not kept up with demand; new issuance in the market from the monthly auction next week should benefit SBAP liquidity.
- Current yield spreads in new issue SBA DCPCs to Treasurys widened 4 bps last week to 45 bps. Spreads are unchanged month over month but 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.
November Fixed-Rate SBA DCPC Auction (SBAP 2020-20K 1 and SBAP 2020-25K 1)
- The November fixed-rate SBA DCPC auction included 10-year, 20-year, and 25-year maturities.
- Spreads tightened 2 bps month over month for 25-year and 20-year terms, respectively (37 bps yield spread for the 25-year term and 28 bps for the 20-year term).
- Spreads are currently tighter than the twelve-month average and are trading at the tightest levels in over a year for all maturity terms.
- Total issuance in the November auction of $245.6M increased $115.0M (+88.1%) from the prior month, which was the lowest level of auction issuance on record.
- The 25-year term represented 76.7% of total issuance in the November auction, while the 20-year term was 18.8%.
Floating-Rate 7(a) Pools
- SBA 7(a) prepay commentary for the month of November resulted in speeds ticking higher for the second-consecutive month for both equipment and real estate pools.
- Equipment loan pools’ prepayments increased from 8.5 to 12.7 CPR, with most individual vintages also seeing an increase in speeds. Real-estate loan pools also rose, going from 6.7 to 11.5 CPR, their second-straight increase after declining for eight of the first nine months this year.
- 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