September 17, 2018
SBA activity was focused on the semi-annual SBIC auction last Thursday, which priced at wider spreads than the previous auctions over the last two years. Activity in the SBA sector improved last week compared to the last month including strong activity in a variety of product offerings in addition to strong investor demand resulting from the SBIC auction.
Fixed-Rate SBIC Debentures
- The SBIC debenture rate is set based off of a market-driven premium to 10-year Treasury Notes.
- The semi-annual SBIC auction priced last Thursday at a spread of 55bps over 10-year Treasury Notes.
- SBIC spreads widened versus the March auction and the 48bp average spread.
- Issuance totaled $923M; down slightly from the prior auction and the 6-year average.
- Demand for SBICs remains strong as they offer superior convexity profiles to most residential MBS alternatives, while offering comparable yields and spreads.
Fixed-Rate DCPC Pools
- The September DCPC auction 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.
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.
- 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 99% chance of a 25bps hike by the Fed on September 26th. 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 2-year Treasury bond (2.78% yield) combined with the floating rate benefits of 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.
Prepayment speeds for equipment loan pools reverted back towards their averages since a year ago, accelerating slightly overall versus a below average August. Real estate pool speeds continued to creep higher, though weak issuance of pools continues to pressure speeds upward as the existing loan population gravitates toward a higher weighted average loan age. Prepayment speeds remain consistent with patterns observed over the last twelve months, with loan age dominating other factors in importance and also with a consistent shape to seasoning vectors for equipment loan and real estate pools. Faster speeds for the 2015 and 2016 vintages can be attributed to their seasoning as the loan populations move toward the elevated portions of seasoning ramps.
Dan Stimpson, CPA
Senior Vice President