Over $2 Billion Leveraged SBA Debentures Priced at 2.938% | Troutman pepper

Licensed by the United States Small Business Administration (SBA) under the Small Business Investment Act of 1958, a Small Business Investment Company (SBIC) represents a privately-owned, operated investment fund that makes long-term investments term in small business America. SBICs invest billions of dollars in small American businesses, engines of economic growth and employment in the United States. A fund primarily becomes licensed as an SBIC to gain access to low-cost, long-term (leveraged) financing from the SBA to enable these private investments to be made.

On March 14, approximately $2.078 billion of debentures issued by SBICs since the September 2021 pooling and sale of SBA-backed certificates of trust for the debentures were priced at an interest rate of 2.938% ( excluding SBA annual fees and commissions described below), representing an 80 basis point premium over the 10-year Treasury bill rate of 2.138%. This interest rate reflects an increase from the second-lowest rate in SBIC program history of 1.304% set in the September 2021 pool and the highest rate since the 2.238% rate set in the September 2019 pool. The March 2022 pool is the largest in program history and eclipses the record September 2021 pool of $1.36 billion by more than $700 million. The maturity date of each debenture included in the March 2022 pool is March 1, 2032. Each debenture is callable in whole (but not in part), without premium or penalty, from payment dates specified.

The debentures are 10-year unsecured loans issued by SBICs with interest only payable semi-annually. SBA obtains funds to provide leverage for the bundled debentures by guaranteeing payment for trust certificates purchased by traditional purchasers of government-backed notes. The SBA then invests the proceeds in SBICs in the form of debentures. The SBA-backed trust certificates for the debentures are pooled and sold to the public in March and September of each year. Most debentures bear a temporary interest rate equal to FHLBC’s fixed regular advance rate (bank advance rate) plus 41 basis points until they are consolidated and sold. The interest rate (excluding an annual SBA charge and 3.435% commitment, usage, underwriting, trust and selling agent fees) on such debentures is fixed at the time of each pool, and the maturity date is 10 years from the date of pooling. In recent years, the interest rate has been set between 2.8 and 133.5 basis points above the 10-year Treasury bill rate. The following graph shows the premium over the 10-year Treasury bill rate for each of the last 10 groupings:

For a more detailed description of the SBIC bond program, Click here.

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