DBRS, Inc. (DBRS Morningstar) upgraded the ratings of Stonebriar Finance Holdings LLC (Stonebriar or the Company) and its related entities, including the Company’s Long-Term Issuer Rating to ‘BBB’ from BBB (low). At the same time, DBRS Morningstar upgraded the ratings of SCF Funding LLC’s Guaranteed Long-Term Senior Debt rating to ‘BBB’, SCF Preferred Equity, LLC’s Long-Term Issuer Rating to ‘BBB’ and Perpetual Preferred Shares rating to BB (high). The trend on all ratings is now Stable. The Company’s Intrinsic Assessment (IA) is ‘BBB’, 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 CREDIT RATING CONSIDERATIONS
The ratings action considers the improved fundamentals of the Company, including a growing franchise underpinned by a strong and highly seasoned management team and a diversifying and entrenched customer base. The ratings action also reflects Stonebriar’s resilient earnings generation capacity, and strong credit and asset performance since inception. While secured wholesale funding continues to be a large component of the funding base, the Company’s funding profile continues to diversify, including an expanding presence of unsecured debt, which benefits its financial flexibility. The Stable trend considers our view that Stonebriar is well positioned to maintain its core earnings momentum and solid balance sheet fundamentals, notwithstanding the slowing economy, still elevated levels of inflation, and higher interest rate environment.
CREDIT RATING DRIVERS
Over the longer-term, continued diversification of the funding profile that further reduces asset encumbrance, combined with moderately lower leverage while maintaining good earnings generation and sustained sound asset performance would result in a ratings upgrade. Meanwhile, a significant contraction in its cushion relative to its leverage covenant requirement, or a sustained deterioration in profitability would result in a ratings downgrade.
CREDIT RATING RATIONALE
The Company maintains a growing commercial equipment financing business which provides both operating leases and secured loans for large ticket equipment across a wide spectrum of asset classes. Stonebriar’s franchise benefits from an entrenched and expanding client base as well as a strong senior management team that has worked together for over 30 years.
Earnings generation is resilient and annual core earnings have reflected an upward trajectory since 2016, driven by higher net interest margin (total portfolio revenues less interest expense) spurred by increasing levels of earning assets. With a solid pipeline of business along with low credit costs, we anticipate that Stonebriar's earnings generation capacity will remain solid and resilient going forward. We also expect future earnings to benefit from the improving efficiencies of operations, as the Company continues to scale its business.
Stonebriar’s risk profile is sound, reflecting strong credit performance across its loan and lease portfolios. Since commencing operations in 2015, the Company has had zero losses, which we see as indicative of Stonebriar's conservative and well-structured originations, the essential nature of the equipment that it finances, its strong servicing platform, and diverse customer base. Residual risk is well-managed with the Company having incurred no impairments on its leased equipment since inception. Stonebriar maintains a conservative depreciation policy utilizing both internal and external data sources to estimate the net orderly liquidation value (NOLV) for the booked residual value on each lease. The Company sees utilization of NOLV as more conservative than observed sale prices or fair value estimates, reducing loss severities. Going forward, we anticipate that the Company’s risk profile will remain sound and credit costs low.
The ratings also consider the improved diversification within the Company’s funding base, and its sound capital profile. Although Stonebriar’s funding position is largely secured, comprised of securitizations and outstanding draws on its secured revolving credit facility, more assets are funded via the growing levels of senior unsecured notes, along with draws on its unsecured revolving credit facility. With its increasing utilization of unsecured debt, asset encumbrance has declined, improving the Company’s financial flexibility. Liquidity is sound, including unrestricted cash and available capacity under its revolving credit facilities, subject to eligible collateral requirements. Lastly, the Company’s capital position including both common and preferred stock is acceptable, and leverage is manageable and well below covenant requirements.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/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/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (July 4, 2023).
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, 2022):
In addition, DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (July 4, 2023) in its consideration of ESG factors.
The following methodologies have also been applied:
•DBRS Morningstar Criteria: Guarantees and Other Forms of Support (March 28, 2023): https://www.dbrsmorningstar.com/research/411694/dbrs-morningstar-global-criteria-guarantees-and-other-forms-of-support.
•DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (October 20, 2022): https://www.dbrsmorningstar.com/research/404248/dbrs-morningstar-global-criteria-preferred-share-and-hybrid-security-criteria-for-corporate-issuers.
The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.
The primary sources of information used for this credit rating include Morningstar Inc. and Company Documents. DBRS Morningstar considers the information available to it for the purposes of providing this credit rating was of satisfactory quality.
The credit rating was initiated at the request of the rated entity. The rated entity or its related entities did participate in the credit rating process for this credit rating action. DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action. This is a solicited credit rating.
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 credit ratings are under regular surveillance.
For more information on this credit or on this industry, visit www.dbrsmorningstar.com.
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