Stonebriar Commercial Finance of both the U.S. and Canada are preparing to issue the latest round of notes secured largely by lease and loan contracts, related to aircraft, energy, marine, medical equipment and equipment manufacturing.
The U.S. and Canada entities will issue some $711.5 million in notes to investors through their respective issuers, the SCF Equipment Leasing 2022-2 LLC and the SCF Equipment Leasing Canada 2022-2 Limited Partnership, in a deal that will inject capital to a pool with a high concentration of obligors, many of whom are weak by credit rating standards, according to rating agencies.
Aside from the equipment lease contracts themselves, the collateral portfolio will include certain portfolio interest certificates and equity interests in certain limited purpose entities formed to own aircraft leases and related aircraft, according to Kroll Bond Rating Agency.
RBC Capital Markets, BNP Paribas Securities and BofA Securities are among the deal's nine initial note purchasers.
The contracts are related to assets in a range of industries including aircraft, energy, marine, medical and equipment manufacturing, KBRA said. Also, branches of Stonebriar Commercial Finance in the U.S. and Canada originated the contracts.
That the issuers—both U.S. and Canadian—included the latter types of contracts is another credit challenge, according to Moody's Investors Service. Participation agreements represent about 18% of contracts in the pool, Moody's said. The issue is that participation agreements represent ownership interests in the cash flows, so for the most part the bondholders will not have control over the underlying contract.
"In addition, should Stonebriar file for bankruptcy the cash flows to bondholders may be delayed," the rating agency said.
Moody's also noted its concern about the high obligor concentration. The asset pool contains 66 contracts, with 33 unique obligors, which is higher than prior Stonebriar deals, the rating agency said. The largest obligor accounts for 10% of the initial pool balance, while the top five obligors account for 39.6% of the initial pool balance.
Yet the transaction also contains certain mitigating factors that help boost ratings. One is collateral diversification, because Stonebriar's U.S. and Canadian finance a broad variety of mi- and large-ticket types of equipment. Also the U.S. and companies have strong management experience and the previous transactions' managed portfolios have performed well, Moody's said.
"Stonebriar's nine prior transactions have experienced zero net losses to date with limited delinquencies," according to Moody's.
More directly, the notes benefit from subordination in the capital structure, according to KBRA. Classes A, B, C, D, E, F-1 and F-2 benefit from subordination levels of 34.95%, 27.90%, 20.40%, 15.10%, 11.85%, 4.75% and 1.70%, KBRA said.
The notes also benefit from initial overcollateralization of 4.0% of the initial pool balance, a fully funded reserve account of 1.0%, and excess spread.
Moody's expects to assign ratings ranging from 'P-1' on the A-1 notes through 'B2' on the class F1 notes, while KBRA intends to assign ratings of 'K1+' through 'B' on the F-2 notes.
