Over $1.276 billion leveraged SBA debenture priced at 4.262%

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 September 14, approximately $1.276 billion of debentures issued by SBICs since the March 2022 pool and sale of SBA-backed certificates of trust for the debentures were valued at an interest rate of 4.262% ( excluding SBA annual fees and commissions described below), representing a Premium of 85 basis points over the 10-year Treasury bill rate of 3.412%. This interest rate reflects an increase from the rate of 2.938% set at the March 2022 pool and the highest rate since the rate of 4.084% set at the March 2011 pool. September 2022 pool is the third largest in the program’s history, and approximately $3.35 billion of debentures were pooled and sold in the 2022 federal fiscal year. each debenture included in the September 2022 pool is September 1, 2032. Each debenture is redeemable in whole (but not in part), without premium or penalty, from specified payment dates.

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. The interest rate recently fell between 2.8 and 133.5 basis points above the 10-year Treasury 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 debenture program, click here.