More Than $1.276B in SBA Debenture Leverage Priced at 4.262%

Licensed by the U.S. Small Business Administration (SBA) under the Small Business Investment Act of 1958, a small business investment company (SBIC) represents a privately owned and operated investment fund that makes long-term investments in U.S. small businesses. SBICs invest billions of dollars in American small businesses — the drivers of economic growth and jobs in the United States. A fund primarily becomes licensed as an SBIC to obtain access to low-cost, long-term financing (leverage) from SBA to enable making these private investments.

On September 14, approximately $1.276 billion of debentures issued by SBICs since the March 2022 pooling and sale of SBA-guaranteed trust certificates for debentures were priced at an interest rate of 4.262% (excluding an annual SBA charge and fees described below), representing an 85 basis point premium to the 10-year Treasury note rate of 3.412%. This interest rate reflected an increase from the 2.938% rate set in the March 2022 pooling and the highest rate since the 4.084% rate set in the March 2011 pooling. The September 2022 pooling is the third largest in program history, and approximately $3.35 billion of debentures have been pooled and sold during the 2022 federal fiscal year. The maturity date for each debenture included in the September 2022 pooling is September 1, 2032. Each debenture may be prepaid in whole (and not in part), without premium or penalty, effective as of specified payment dates.

Debentures are unsecured 10-year loans issued by SBICs with interest only payable semiannually. SBA obtains funds enabling it to supply leverage for pooled debentures by guaranteeing payment of trust certificates purchased by traditional purchasers of government-guaranteed notes. SBA then invests the proceeds in SBICs in the form of debentures. SBA-guaranteed trust certificates for debentures are pooled and sold to the public in March and September each year. Most debentures bear a temporary interest rate equal to the FHLBC Fixed Regular Advance Rate (Bank Advance Rate), plus 41 basis points until they are pooled and sold. The interest rate (excluding an annual SBA charge and 3.435% in commitment, user, underwriting, trustee, and selling agent fees) on these debentures is fixed at the time of each pooling, and the maturity date is 10 years from the pooling date. The interest rate recently has fallen between 2.8 and 133.5 basis points in excess of the 10-year Treasury note rate. The following chart shows the premium over the 10-year Treasury note rate for each of the last 10 poolings:

For a more detailed description of the SBIC debenture program, click here.

For additional information, contact:

Christopher A. Rossi (SBIC Practice Group Chair) | 610.640.7846 | Christopher.Rossi@Troutman.com

Michael A. Temple | 248.359.7385 | Michael.Temple@Troutman.com