September 14, 2020
Fixed-Rate SBIC Debentures
- The September SBIC auction is expected to price later this week. SBIC debentures are issued semi-annually in March and September.
- SBIC debentures and fixed-rate SBA DCPC pools remain attractive as they offer superior convexity profiles to most residential MBS alternatives, while offering comparable yields and spreads.
- Vining Sparks is currently seeking indications of interest for secondary market purchase of the September new-issue SBIC.
- The SBIC debenture rate is set based off of a market-driven premium to 10-year swap rates.
- Yield spreads have tightened considerably over the last 6 months from the historically wide spreads in the March SBIC auction, which priced at a historically wide spread of 131 bps over the 10-year Treasury.
- Current conditions in the SBA and the broader market indicate that initial pricing in the September SBIC auction is expected to be in line with the long-term average spread of 53 bps over the 10-year Treasury.
- Initial price indications for the September auction (SBIC 2020-10B 1) at 10 CPR and +40 bps to the 10-year swap rate:
- 0.94% Yield | 6.3yr Average Life | Approx. 56 bps Spread to Treasurys
Fixed-Rate SBA DCPCs
- Historically high new issuance from the monthly auction last week benefited SBAP liquidity, which has not kept up with demand in the market.
- Current yield spreads in new-issue SBA DCPCs to Treasurys were unchanged last week at 38 bps. Spreads have tightened 4 bps over the last month and have tightened 24 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.
September Fixed-Rate SBA DCPC Auction (SBAP 2020-20I 1 and SBAP 2020-25I 1)
- The September fixed-rate SBA DCPC auction last week, which included 10-year, 20-year, and 25-year maturities, drew strong investor interest as SBA DCPCs and SBICs offer superior convexity profiles to most residential MBS alternatives, while offering comparable yields and spreads.
- Historically high total issuance in the monthly auction of $1.284B increased $909.5M (+242.7%) from the prior month and was the highest level of auction issuance on record. The 25-year term represented 70.2% of total issuance and the 20-year term represented 26.8% of total issuance.
- Borrowers are benefiting from historically low rates, locking in the lowest debenture rates in the 504 program’s history over the last 3 months. Small businesses are also receiving 6-months of loan payments provided by SBA on existing loans and new loans fully disbursed between March 27 and September 27.
- Yield spreads continued their recent tightening trend in this month’s auction. Spreads have tightened considerably over the last 5 months from the historically wide spreads in April. Spreads are currently tighter than the twelve-month average for 20-year and 25-year maturities.
- Spreads tightened 6 and 5 bps month over month for 25-year and 20-year terms, respectively (44 bps yield spread for the 25-year term and 34 bps for the 20-year term).
Floating-Rate 7(a) Pools
- 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