The U.S. Small Business Administration (SBA) has announced that the latest pooling of Small Business Investment Company (SBIC) Debentures was priced at 2.877%, which is the lowest pricing of a debenture pooling in the history of the SBIC program. The interest rate SBICs must pay on debentures included in this pool will be fixed for a ten-year period at a rate based on this historically low pricing.

SBICs that issue debentures pay interest on those debentures at a LIBOR-based rate until the next semi-annual debenture pooling. In that pooling, the interest rate on the pooled debentures is fixed for ten years at a rate based on the pricing of the pool (in this case, 2.877%) plus an annual SBA charge. Debenture interest payments are due semi-annually, and a balloon payment of the entire principal amount of the debentures due on the tenth anniversary of the pooling. SBIC debentures may be prepaid in whole or in part at any time, without premium or penalty. However, SBA debentures may only be repaid in full in the tranche draw down.

It should be noted, however, that SBICs are not permitted to refinance existing debentures to take advantage of the new, historically low rate. SBA issued a policy letter on July 26, 2011, stating SBA’s position that an SBIC may not use the proceeds of any new debentures to prepay outstanding debentures. SBA’s position is based on Section 107.1230(d)(4) of the SBIC regulations, which section provides that an SBIC may use debenture proceeds only to fund small businesses or to provide liquidity for the SBIC’s operations. SBA does not consider the prepayment of outstanding, higher-rate debentures to constitute liquidity for an SBIC’s operations. As a result, it is not possible for current SBIC’s to refinance their existing leverage at this new historic low rate.

SBICs should consult with counsel if they have additional questions about obtaining leverage at the new historic low rates, or other specific leverage or license questions.