October 28, 2019
Fixed-Rate DCPC Pools
- The October fixed-rate SBA DCPC auction attracted strong investor interest as many portfolio managers are considering strategies to extend duration and call structures to protect against falling rates.
- Fixed-rate SBA DCPC pools and SBIC debentures remain attractive as they offer superior convexity profiles to most residential MBS alternatives, while offering comparable yields and spreads.
- The October fixed-rate DCPC auction included 20-year and 25-year maturities. Total issuance declined and spreads widened in the October auction compared to the prior month.
- For the third consecutive month issuance in the 25-year term exceeded the 20-year term. Issuance for the 25-year term totaled $197.5M in October, while the 20-year term totaled $175.6M. Total issuance in the October auction declined $12.3M (-3.2%) compared to September.
- Spreads widened 2 bps in the October auction for the 25-year term and widened 4 bps for the 20-year term; however, yield spreads remain tighter than the twelve-month average.
- Current yield spreads on newer and seasoned SBA DCPC’s are pricing at approximately 60 bps or wider to Treasurys (I-curve).
Fixed-Rate SBIC Debentures
- The semi-annual SBIC auction was held last month. The trust certificate rate fixed coupon was 2.28% and pool issuance totaled $991.6 million.
- The SBIC new issue (SBIC 2019-10B 1) is currently priced to yield 2.267% at 10 CPR, an approximate 54 bps yield spread to Treasurys (I-curve) and a 6.2-year average life.
- The SBIC debenture rate is set based off of a market-driven premium to 10-year Treasury Notes. SBIC auction history is included below.
Floating-Rate 7(a) Pools
- SBA floating pools with uncapped quarterly resets indexed to Prime offer attractive yield opportunities compared to 3-month T-Bills.
- Many floating-rate bond options currently offer similar yields compared to longer duration fixed-rate bonds, driven by a flat yield curve between 3-month and 5-year Treasurys.
- SBA prepayment speeds for SBA 7(a) Equipment and Real-Estate pools both posted slower speeds for the month of October. Equipment loan pools declined from September’s 18.1 CPR to 16.6 CPR. This was driven by broad-based declines in 2017 and 2018 vintages. Real-Estate loan pools declined from 19.4 CPR in September to 18.7 CPR; which, unlike equipment pools, was driven by declines in almost every vintage except 2017 and 2018.
- It is critically important to evaluate pools at a wide variety of speeds and also 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.
Government Guaranteed Loan Trading
Government-guaranteed USDA agricultural FSA loan trading has been slow the last several weeks as supply remains a challenge, while demand for these loans remains high. As has been the case for some time, supply and not demand limits loan trading volumes.
Dan Stimpson, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP