The new pooling price announced by the U.S. Small Business Administration (SBA) for Small Business Investment Company (SBIC) debentures plays an important role for stakeholders, who need to understand its impact on funding, costs, and strategy.
In September this year, the U.S. Small Business Administration (SBA) announced the new pooling price for Small Business Investment Company (SBIC) debentures. $1.24 billion of SBIC debentures were priced at an interest rate of 4.38%—a spread to 10-Year Treasuries of 65 bps.
As with previous announcements, this new price for SBIC debentures is a significant development in the U.S. small business investment landscape. This semiannual update, which follows one in March, is crucial for SBICs, as well as the small businesses they ultimately invest in, as it impacts the cost and structure of funding for underlying investments.
The SBIC debenture rate is determined by a market-driven premium over the 10-Year Treasury Notes. The latest rate decrease is attributed to the fall in the 10-Year Treasury rate and a decrease in the premium above these notes.
SBICs that drew down debentures between March 2024 and September 2024 locked in the 4.38% interest rate for the 10-year term of the debentures.
Interest payments on these debentures are due semiannually, with the entire principal amount due as a balloon payment on the tenth anniversary of the pooling. SBIC debentures are fixed-rate, non-amortizing notes that can be prepaid without penalty.
How SBICs provide long-term support for U.S. small businesses
A SBIC is a privately owned and operated investment fund, licensed by the U.S. Small Business Administration under the Small Business Investment Act of 1958.
SBICs play a crucial role in supporting the U.S. economy by making long-term investments in small businesses, which are essential drivers of economic growth and job creation. These funds gain access to low-cost, long-term financing, or leverage, from the SBA, enabling them to make substantial private investments in American small businesses.
The Small Business Investor Alliance states, “SBICs provide critical, long-term capital to small businesses. With the banking sector under stress, SBICs will continue to provide the growth capital that America needs.”
An updated regulatory framework
Given its importance and influence in the small business funding space, the SBIC program has been updated over the years, and fund managers need to make sure they keep on top of changes and meet compliance standards. In August 2023, for instance, the SBA’s major set of updates to the regulations governing the SBIC program came into effect, referred to as The Final Rule.
The SBIC reform included a new type of debenture, referred to as an accrual debenture, which is designed to facilitate more equity-focused investments. The accrual debenture permits longer-duration cash flows to align with the cash flows of equity-oriented investment funds. The updates also streamlined certain aspects of the SBIC licensing process.
How working with a trusted partner can help
SBIC investments present complex administrative, reporting, and compliance requirements that are constantly changing.
With more than 20 years of experience handling SBIC fund administration demands and a single-source provider service model, CSC is extremely well positioned to help.
We offer a breadth of services that ensure more timely reporting, streamlined workflows, and less time overseeing multiple vendors. CSC services include preparation of annual financial statements, capital account schedules, Small Business Administration reporting, fund set-up, and onboarding.
Our services are tailored to our clients’ requirements, from bespoke investor reporting to regulatory compliance services. We form strong partnerships with clients from the outset of our relationship.
Learn how CSC can help: www.cscglobal.com/service/funds/fund-administration/sbic/
