DBRS Morningstar Assigns BBB (low) LT Issuer Rating to Stonebriar Finance Holdings LLC; Trend Stable

DBRS, Inc. (DBRS Morningstar) has assigned ratings to 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). The trend on the ratings is 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 consider Stonebriar’s solid and growing commercial equipment finance business underpinned by a strong senior management team with deep industry knowledge. The Company, is the largest privately held independent commercial equipment finance business in the U.S. and is majority owned by Eldridge Industries LLC, and to a lesser degree Stonebriar management and board members. The ratings reflect Stonebriar’s resilient and improving earnings generation, and better than anticipated performance through the ongoing Coronavirus Disease (COVID-19) pandemic. Stonebriar maintains a sound risk profile, and credit costs remain very low. The Company’s loan and lease portfolio reflect solid diversification by asset class and industry. However, there are customer concentrations within its portfolio, which have been well managed to date. Although Stonebriar's assets are supported by secured wholesale funding, the issuance of guaranteed senior unsecured notes over the last two years and the recent establishment of an unsecured revolving credit facility provide some diversity to its overall funding profile. Meanwhile, Stonebriar maintains an acceptable capital position, given its solid earnings generation and sound credit profile. Overall, the Stable trend reflects DBRS Morningstar’s expectations that Stonebriar’s credit fundamentals will remain solid over the medium term.

RATING DRIVERS
Consistent expansion in earnings with appropriate returns, while maintaining sound credit and asset performance and balance sheet leverage below 5.0x, would result in an upgrade in the ratings. A significant deterioration in the Company's credit or asset performance, weakening earnings generation, or a reduced cushion relative to its leverage covenant, would lead to a downgrade.

RATING RATIONALE
Stonebriar maintains a solid commercial equipment financing business in the U.S., providing both operating leases and secured loans for a variety of large ticket equipment to middle market companies across a wide range of industries and a growing entrenched customer base. The Company’s operating platform consists of four segments including General Equipment, Aviation Capital, Rail Leasing, and Real Estate Funding. The General Equipment segment, which represents almost half of the Company’s total loans and leases, provides equipment finance solutions secured by long-lived assets to a large number of middle-market businesses. The Aviation Capital business offers customized capital solutions to owners, operators, dealers and manufacturers of business and commercial aircraft globally. The Rail Leasing business offers complete rail leasing solutions to shippers, manufacturers and railroads in North America. The Real Estate funding business, which is Stonebriar's smallest operating segment, primarily focuses on sourcing owner-occupied commercial real estate loans.

Earnings power remains solid, despite the ongoing coronavirus pandemic. In general, Stonebriar's core earnings have reflected an upward trajectory since the Company's inception, driven by consistently higher annual net finance income, spurred by strong originations. Credit costs remain low and loss absorption capacity remains very strong. Overall, the Company’s profitability measures, including its pre-tax return on assets remain solid. Going forward, we anticipate that Stonebriar's earnings will remain sound, reflecting resilient levels of originations, sound efficiencies of operations, and low credit costs.

Stonebriar maintains a sound risk profile, reflecting better than anticipated asset and credit performance through 2020 and into 2021, despite the steep economic contraction in 1H20 induced by the pandemic. Indeed, the Company has maintained its position of not generating a net loss on its loan or lease portfolio since inception. We consider the sound asset performance as illustrating Stonebriar's sound risk profile which is anchored by its conservative and well-structured originations, the mission critical nature of the equipment that it finances, its strong servicing platform, and diverse customer base. Over the medium term, we anticipate Stonebriar's risk profile will remain sound and its credit costs low.

Overall, Stonebriar’s funding is primarily comprised of securitizations and outstanding draws on its warehouse facility, and to a lesser extent, guaranteed senior unsecured notes. Meanwhile, liquidity remains sound, consisting of unrestricted cash, and available capacity under its revolving credit facilities, subject to eligible collateral requirements. Finally, Stonebriar maintains acceptable capital, while leverage is manageable and comfortably below covenant requirements.

ESG CONSIDERATIONS
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/373262.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is the Global Methodology for Rating Non-Bank Financial Institutions (September 29, 2020): https://www.dbrsmorningstar.com/research/367510/global-methodology-for-rating-non-bank-financial-institutions. Other applicable methodologies include the DBRS Morningstar Criteria: Guarantees and Other Forms of Support (May 31, 2021): https://www.dbrsmorningstar.com/research/379424/dbrs-morningstar-criteria-guarantees-and-other-forms-of-support, and DBRS Morningstar Criteria – Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021): https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.

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