September 10, 2018
SBA activity was focused on the DCPC auction last Thursday, which included 10yr, 20yr and 25yr terms. Demand for DCPCs and SBICs (SBIC semi-annual auction pricing later this week or next) remains strong as they offer superior convexity profiles to most residential MBS alternatives, while offering comparable yields and spreads.
Fixed-Rate DCPC Pools
- The DCPC auction last Thursday included 10yr, 20yr and 25yr terms.
- Yield spreads versus Treasuries remain at the wide end of their ranges for the last several auctions.
- The 64bp spread over Treasuries for the twenty-year DCPC auction in September was unchanged from the prior month, while the twenty five-year term tightened a basis point to 76bps.
- The ten-year DCPC auction priced at a spread of 38bps, 6bps tighter than the July auction.
- Pool issuance in the September auction for the 10yr and 25yr terms increased over the previous auction, while 20yr pool issuance declined $65.4M to $278.9M.
Fixed-Rate SBIC Debentures
- The semi-annual SBIC auction is expected to price late this week or early next week.
- SBIC spreads in the upcoming auction are expected to widen versus the March auction.
- Demand for SBICs remains strong as they offer superior convexity profiles to most residential MBS alternatives, while offering comparable yields and spreads.
Floating-Rate 7(a) Pools
- Investors have remained active in floating rate equipment pools offered at par and also those with premium pricing.
- Ten-year WAM equipment-loan pools should attract investor interest due to the cash flows from shorter-amortization schedules. Many equipment-loan pools offer favorable yields and margins using recent market prices and realistically vectored prepayment speeds.
- Pricing levels on SBA floating pools with uncapped quarterly resets indexed to Prime offer attractive yield opportunities versus interest bearing cash and fed funds returns and also when compared to other floating rate bond alternatives. Yields ranging from approximately 2.30% on par pools and 2.50% or higher on premium pools are currently available.
- The fed funds futures market is currently pricing in a 96% chance of a 25bps hike by the Fed in late September. With a 25bps hike in fed funds, floating rate SBA equipment pools would yield 2.72% using the current prepayment vector, a comparable yield to a 5-year Treasury bond (2.83% yield) combined with the floating rate benefits of significantly lower price volatility and effective duration.
Government Guaranteed Loan Trading
Government-guaranteed USDA agricultural loans and SBA loans actively traded to financial institutions last week. As has been the case for some time, supply and not demand limits loan trading volumes.
Maturity Band Tightening – October 1st
The SBA has announced and the Federal Register now reflects a slight tightening of the maturity bands for new SBA pools issued subsequent to October 1st. The shortest maturity of any loan in a pool issued subsequent to October 1st will now need to be at least 95% of the longest, adjusted upward from the current 94%. This brings cash flows on pools in closer alignment with cash flows on the underlying loans, a stated objective of the SBA. In essence, this brings pools one small step closer to being true pass-throughs. The change has zero effect on any existing pools.
Dan Stimpson, CPA
Senior Vice President