September 20, 2021
Fixed-Rate SBIC Debentures – Semi-Annual Auction
- The SBIC semi-annual auction last week was in high demand from investors. Activity in SBIC new issue bonds was robust.
- SBICs offer superior convexity profiles to most residential MBS alternatives and typically offer a yield pickup over agency bullets. SBICs have a maturity date of 10 years and do not amortize.
- Yield spreads in the September 2021 SBIC auction remained historically tight, pricing at 3 bps over the 10-year Treasury. The trust certificate rate declined 37 bps from 1.67% to 1.30%. Issuance in the current auction increased $264.7 million (+24.2%) to $1.360.4 billion, which is the highest level of issuance in over 15 years.
Fixed-Rate SBA DCPCs (SBAP)
- Investor interest in the September fixed-rate SBA DCPC auction remained strong as SBA DCPCs and SBICs offer superior convexity profiles to most residential MBS alternatives. The DCPC auction has priced at historically tight spreads for much of this year; however, spreads have widened approximately 25 bps over the last three months.
- Supply in the secondary market for SBA fixed rate product has not kept up with demand; new issuance in the market from the September auction improved liquidity in the SBA market. Issuance has trended higher over the past eleven months from the lows in October 2020. Auction issuance of $635.1M in September is the highest level in a year.
- The current yield spread of 25 bps in new issue SBA DCPCs to Treasurys tightened 2 bps last week. Spreads are unchanged month over month but have tightened 4 bps year to date.
- 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 2021-20I and SBAP 2021-25I)
- The September fixed-rate SBA DCPC auction included 10-year, 20-year and 25-year maturities.
- Debenture rates rose 11 bps to 1.56% (25yr) and 1.38% (20yr) in the September auction. Debenture rates are 18 bps (25yr) and 13 bps (20yr) above their twelve-month average.
- Total issuance of $635.1M increased $170.4M (36.7%) from the prior month; highest level of issuance in a year.
- The 25-year term represented 84.8% of total issuance in the auction.
- Debenture rates to Treasury spreads tightened 2 bps month over month for the 25-year and 20-year terms (23 bps spread for the 25-year term and 5 bps for the 20-year term). Spreads have widened 25 bps from the historically tight levels in the June auction.
- Spreads are currently near than their respective twelve-month average for both maturity terms (4 bps wider for the 25-year term and 1 bp tighter for the 20-year term).
Floating-Rate SBA 7(a) Pools
- SBA 7(a) prepay commentary will be released later this week. Prepayment speeds for both equipment and real-estate loan pools increased in August for the fifth straight month.
- 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