October 19, 2020
Fixed-Rate SBA DCPCs
- The October fixed-rate SBA DCPC auction drew 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 benefited SBAP liquidity.
- Current yield spreads in new issue SBA DCPCs to Treasurys widened 2 bps last week to 48 bps. Spreads have widened 5 bps over the last month but have tightened 14 bps YTD.
- 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 2020-20J 1 and SBAP 2020-25J 1)
- The October fixed-rate SBA DCPC auction included 20-year and 25-year maturities.
- Spreads tightened 5 and 4 bps month over month for 25-year and 20-year terms, respectively (39 bps yield spread for the 25-year term and 30 bps for the 20-year term). Spreads are currently tighter than the twelve-month average for 20-year and 25-year maturities.
- Historically low total issuance in the October auction of $130.5M fell $1.154B (-89.8%) from the prior month and was the lowest level of auction issuance on record.
- The decline in volume in the October auction follows historically high total issuance in the monthly auction in September of $1.284B, which was the highest level of auction issuance on record.
Floating-Rate 7(a) Pools
- SBA 7(a) prepayment speeds in October increased as most vintages for both equipment and real-estate loan pools experienced a bump up in speeds, bucking the usual downward trend experienced in the fall season. Equipment loan pools increased from 5.9 to 8.5 CPR, with most individual vintages also experiencing upward trajectory. Real-estate loan pools also rose, going from 5.7 to 6.7 CPR, reversing the downward trend they had been experiencing for eight of the last nine months.
Dan Stimpson, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP