September 21, 2020
Fixed-Rate SBIC Debentures
- The September semi-annual SBIC auction held last week was in high demand from investors, while the pool size issued was at the lowest level since 2013.
- 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.
- Yield spreads in the SBIC auction tightened considerably to 36 bps over the 10-year Treasury. The March SBIC auction priced at a historically wide spread of 134 bps.
- SBIC borrowers are benefiting from historically low rates, locking in the lowest trust certificate rate in the program’s history at 1.03%; however, total issuance in the SBIC auction of $685.45M was the lowest since September 2013.
Fixed-Rate SBA DCPCs
- Historically high new issuance from the monthly auction two weeks ago benefited SBAP liquidity, which has not kept up with demand in the market.
- Current yield spreads in new issue SBA DCPCs to Treasuries widened 5 bps last week to 43 bps. Spreads have widened 3 bps over the last month but have tightened 19 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 included 10-year, 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). Spreads are currently tighter than the twelve-month average for 20-year and 25-year maturities.
- 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.
Floating-Rate 7(a) Pools
- SBA 7(a) prepayment speeds in September fell and continue to prepay at historically slow speeds. Equipment loan pools decreased from 6.8 to 5.9 CPR, with results evenly mixed among vintages. Real-estate loan pools also dropped, going from 6.2 to 5.7 CPR, their seventh decrease in the last eight months.
- 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