September 30, 2019
Fixed-Rate SBIC Debentures
- The semi-annual SBIC auction was held two weeks ago. The trust certificate rate fixed coupon was 2.28% and pool issuance totaled $991.6 million.
- The new-issue SBIC and seasoned SBIC pools have seen strong investor interest as many portfolio managers are considering strategies to extend duration and call structures to protect against falling rates.
- Fixed-rate SBA DCPC pools and SBIC debentures remain attractive as they offer superior convexity profiles to most residential MBS alternatives, while offering comparable yields and spreads.
- The SBIC new issue (SBIC 2019-10B 1) is currently priced to yield 2.11% at 10 CPR, an approximate 49 bps spread to Treasurys and a 6.3-year average life.
- The SBIC debenture rate is set based off of a market-driven premium to 10-year Treasury Notes. SBIC auction history is included below.
Fixed-Rate DCPC Pools
- The September fixed-rate DCPC auction included 10-year, 20-year, and 25-year maturities. Issuance increased and spreads widened in September for all maturity terms compared to the prior month.
- For the second consecutive month issuance in the 25-year term exceeded the 20-year term. Issuance for the 25-year term totaled $203.4M in September, while the 20-year term totaled $166.2M. Issuance in the September auction increased $74.8M (+24.1%) compared to August.
- Yield spreads in the September auction were tighter than the twelve-month average for the longer terms. Spreads widened 1 bp in the September auction for the 20-year and 25-year maturities.
- Current spreads on newer and seasoned SBAP’s are pricing at approximately 60 bps or wider to the I-curve.
Floating-Rate 7(a) Pools
- SBA floating pools with uncapped quarterly resets indexed to Prime offer attractive yield opportunities compared to 3-month T-Bills.
- Many floating-rate bond options currently offer similar and even higher yields than longer duration fixed-rate bonds, driven by an inverted yield curve between 3-month and 10-year Treasurys.
- SBA prepayment speeds for SBA 7(a) Equipment and Real-Estate pools posted mixed CPRs for the month of September. Equipment loan pools saw an increase from August’s 17.0 CPR to 18.1 CPR, reversing a four-month downward trend. This was driven by broad-based increases in most vintages. Real-Estate loan pools experienced a slight decline from 20.1 CPR in August to 19.4 CPR.
- It is critically important to evaluate pools at a wide variety of speeds and also 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.
Government Guaranteed Loan Trading
Government-guaranteed USDA agricultural FSA loans actively traded last week as supply has improved over the last several weeks, while demand for these loans remains high. As has been the case for some time, supply and not demand limits loan trading volumes.
Dan Stimpson, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP