Morningstar DBRS Confirms Stonebriar Finance Holdings LLC Long-Term Credit Rating at BBB; Trend Stable

DBRS, Inc. (Morningstar DBRS) confirmed the credit ratings of Stonebriar Finance Holdings LLC (Stonebriar or the Company) and related entities, including Stonebriar's Long-Term Issuer Rating of BBB, SCF Funding LLC's Guaranteed Long-Term Senior Debt rating of BBB, as well as SCF Preferred Equity, LLC's Long-Term Issuer Rating of BBB and Perpetual Preferred Shares rating of BB (high). The trend on all ratings is Stable. The Company's Intrinsic Assessment (IA) is BBB, while its Support Assessment is SA3 resulting in the final rating of Stonebriar to be equalized with its IA. 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 Company's credit ratings and Stable trend consider its solid and growing commercial equipment finance franchise, including a strong senior management team and a diverse customer base. Earnings generation is resilient, underpinned by solid net interest margin (NIM) and low credit costs. Credit quality remains strong reflective of Stonebriar's conservative origination platform and strong servicing operations. Although funding is predominantly secured, it has become more diverse over the past few years, driving higher levels of unencumbered assets, benefiting the Company's financial flexibility. The Stable trend reflects our view that Stonebriar is well positioned to maintain its solid credit fundamentals, despite the higher for longer interest rate environment.

CREDIT RATING DRIVERS
Over the longer-term, a further reduction in asset encumbrance combined with lower leverage while maintaining good earnings generation and sustained sound asset performance would result in a credit 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 credit ratings downgrade.

CREDIT RATING RATIONALE
Franchise Building Block (BB) Assessment: Good/Moderate
Stonebriar's commercial equipment finance franchise provides both secured loans and operating leases for large ticket equipment. The Company's client base is deep and positioned across a wide spectrum of industries. The senior management team is strong and highly seasoned, having worked together for over three decades.

Earnings Building Block (BB) Assessment: Good
Earnings generation is solid, reflecting strong originations and sustained earning asset growth. Although funding costs have increased, due in part to higher interest rates, the Company has been able to re-price its new originations, benefiting its NIM (total portfolio revenues less interest expense). Earnings performance also reflects Stonebriar's low credit costs and significant loss absorption capacity. Going forward, we expect earnings generation to remain solid, despite the higher-for-longer interest rate environment.

Risk Building Block (BB) Assessment: Good
The Company's risk profile remains sound. Stonebriar's credit and asset performance have been strong since the Company's inception. Indeed, the Company has reported zero losses since its founding. The strong risk profile reflects its conservative and well-structured originations, the essential nature of the equipment that it finances, its strong servicing platform, and diverse customer base. Of note, there is some customer concentration within the portfolio. However, these concentrations have somewhat moderated through a broadening customer base and its dedicated syndication partnership, Granite Park, which acquires portions of its originations. Going forward, we anticipate Stonebriar's risk position will remain sound and credit costs low.

Funding and Liquidity Building Block (BB) Assessment: Moderate/Weak
Funding is mostly secured, primarily consisting of securitizations and draws from its secured revolving credit facility. We view positively the Company's issuances of senior unsecured debt over the last few years along with its recently upsized unsecured revolving credit facility as driving higher levels of unencumbered assets and improving its financial flexibility. Stonebriar's liquidity is acceptable, reflecting unrestricted cash and available capacity under its revolving credit facilities, subject to eligible collateral requirements.

Capitalization Building Block (BB) Assessment: Moderate
Capitalization is acceptable given the Company's solid earnings generation capacity and sound risk profile. Importantly, balance sheet leverage is manageable and comfortably below covenant requirements.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS   
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at (January 23 2024) https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

Notes:
All figures are in US Dollars unless otherwise noted.

The principal methodology is the Global Methodology for Rating Non-Bank Financial Institutions (15 April 2024) https://dbrs.morningstar.com/research/431187. In addition Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024) https://dbrs.morningstar.com/research/427030 in its consideration of ESG factors.

The following methodology has also been applied:
Morningstar DBRS Global Corporate Criteria (15 April 2024) https://dbrs.morningstar.com/research/431186

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The primary sources of information used for these credit ratings include Morningstar, Inc. and company documents. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings 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.

Morningstar DBRS 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. Morningstar DBRS' outlooks and credit ratings are under regular surveillance.

For more information on this credit or on this industry, visit dbrs.morningstar.com.

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