DBRS, Inc. (DBRS Morningstar) confirmed the ratings of Stonebriar Finance Holdings LLC (Stonebriar or the Company) and related entities, including Stonebriar’s Long-Term Issuer Rating of BBB (low), SCF Funding LLC’s Guaranteed Long-Term Senior Debt rating of BBB (low), and SCF Preferred Equity, LLC’s Long-Term Issuer Rating of BBB (low) and Perpetual Preferred Shares rating of BB. The trend on all ratings has been revised to Positive from Stable. The Company’s Intrinsic Assessment (IA) is BBB (low), while its Support Assessment is SA3. SCF Funding LLC’s Guaranteed Long-Term Senior Debt rating benefits from a guarantee from Stonebriar, and as a result is equalized to the Long-Term Issuer Rating of Stonebriar.
KEY RATING CONSIDERATIONS
The ratings confirmation and Positive trend consider Stonebriar’s solid and expanding commercial equipment finance business, underpinned by a strong senior management team with deep industry knowledge, along with an entrenched and diverse client base. The ratings reflect the Company’s resilient earnings generation capacity, and strong credit and asset performance since inception. While still heavily reliant on secured wholesale funding, Stonebriar has been improving its funding profile through the issuance of unsecured debt. The Positive trend reflects our view that the Company is well positioned to maintain its earnings momentum along with its solid credit fundamentals, despite the uncertain economic outlook and rising interest rate environment.
Maintaining solid earnings generation, along with sound credit and asset performance, while continuing to diversify funding, would result in a ratings upgrade. Weaker than expected earnings or credit and asset performance, would result in a return of the ratings to Stable trend. Meanwhile, a significant contraction in its cushion relative to its leverage covenant requirement, would result in a ratings downgrade.
Stonebriar has a solid commercial equipment financing franchise which provides both operating leases and secured loans for a variety of large ticket equipment to large and middle market companies operating in North America, across a wide spectrum of asset classes. The Company’s franchise is underpinned by an entrenched and growing customer base, along with a strong core management team that has worked together for over 30 years. Overall, Stonebriar’s equipment financing portfolio is diverse across numerous asset classes, with the top five classes representing just over half of the portfolio.
Earnings attributable to the Company have consistently improved year-on-year, driven by continued growth in earning assets. Recently, earnings have benefited from large lease termination fees, which are expected to recur less frequently. However, on an adjusted basis which excludes these nonrecurring items, Stonebriar’s earnings and returns have been sound and supportive of the rating actions. Stonebriar’s solid earnings generation continues to benefit from low credit costs, and its loss absorption capacity is very strong. Despite the slowing economy and rising interest rate environment, we anticipate that Stonebriar's earnings will be resilient, benefiting from sound levels of originations, and improving efficiencies of operations as the Company continues to scale its operations.
The Company’s risk profile is sound, underscored by the strong performance of its loan and lease portfolios. Indeed, after recoveries, Stonebriar has had zero losses since commencing operations in 2015. We see this performance as demonstrating Stonebriar's conservative and well-structured originations, the essential nature of the equipment that it finances, its strong servicing platform, and diverse customer base. Over the medium term, we anticipate that the Company’s risk profile will remain sound and credit costs low.
A ratings constraint, Stonebriar’s funding position is mostly secured, comprised of securitizations and outstanding draws on its secured revolving credit facility. To a lesser extent, assets are funded by growing levels of senior unsecured notes, along with draws on its unsecured revolving credit facility. Positively, the increasing utilization of unsecured debt represents a growing component of the Company’s funding, driving higher levels of unencumbered assets and improving its financial flexibility. Liquidity is acceptable, reflecting unrestricted cash and available capacity under its revolving credit facilities, subject to eligible collateral requirements. Finally, Stonebriar’s capital profile is acceptable, and leverage is manageable and comfortably below covenant requirements.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental, Social or Governance factors that had a significant or relevant effect on the credit analysis.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.
All figures are in U.S. dollars unless otherwise noted.
The principal methodology is the Global Methodology for Rating Non-Bank Financial Institutions (September 2, 2021): https://www.dbrsmorningstar.com/research/383936/global-methodology-for-rating-non-bank-financial-institutions. Other applicable methodologies include the DBRS Morningstar Criteria: Guarantees and Other Forms of Support (April 4, 2022): https://www.dbrsmorningstar.com/research/394683/dbrs-morningstar-criteria-guarantees-and-other-forms-of-support, DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (October 21, 2021): https://www.dbrsmorningstar.com/research/386355/dbrs-morningstar-criteria-preferred-share-and-hybrid-security-criteria-for-corporate-issuers, and DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (May 17, 2022): https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.
Each of the methodologies employed in the analysis addressed one or more particular risks or aspects of the rating and were factored into the rating decision. The DBRS Morningstar Criteria, Guarantees and Other Forms of Support (April 4, 2022) was utilized in the rating of SCF Funding LLC, while the DBRS Morningstar Criteria, Preferred Share and Hybrid Security Criteria for Corporate Issuers (October 21, 2021), was utilized in determining the equity weighting of SCF Preferred Equity, LLC’s perpetual preferred shares.
The primary sources of information used for this rating include Company Documents. DBRS Morningstar considers the information available to it for the purposes of providing this rating was of satisfactory quality.
The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.
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