DBRS Morningstar confirmed the long-term ratings of Stellus Capital Investment Corp. to BBB with a stable trend
The trend on all ratings is stable. The company’s intrinsic rating (IA) is BBB, while its support rating is SA3, making Stellus’ final ratings in line with its IA.
KEY SCORING CONSIDERATIONS
The confirmation of the ratings reflects the continued growth of Stellus’ portfolio while generating acceptable earnings, maintaining credit quality performance and regulatory leverage at its target level. The company is backed by its lower-middle-market lending franchise with a management team that has worked together for decades through multiple economic and business cycles. The Company has a diversified funding profile with well-laddered maturities, including low-cost SBA debt, which are excluded from regulatory leverage limits. The ratings reflect the company’s high overall financial leverage (including SBA debt) mitigated by its focus on sponsor-backed portfolio companies and increased senior secured portfolio composition.
The stable trend reflects our view that geopolitical instability in
Longer term, strong and sustained earnings supported by growth in the investment portfolio while maintaining strong credit quality and disciplined deployment of leverage would lead to improved ratings. Conversely, a sustained increase in overall financial leverage (despite regulatory SBA debt relief) would cause ratings to downgrade. Poor performance of the investment portfolio which erodes the net asset value (NAV), or if dividend distributions are not covered by net investment income for an extended period, would also result in downgrading of ratings.
The Company’s franchise benefits from access to
Earnings have remained relatively strong, supported by a growing investment portfolio that generates consistent interest income. Stellus announced a net increase in net operating assets (net income) of
The Company’s risk profile is acceptable and has benefited from management’s strategic shift towards sponsor-backed senior lending to lower middle market companies from riskier junior capital. Senior loans represented 84% of the investment portfolio at the end of 2021, a dramatic increase from 38% at the end of 2017. Credit performance was reasonable with three investments not recognized, representing 4.0% of the total investment portfolio. at cost at end-2021, down from the peak of 6.4% of the total investment portfolio at cost in 3Q20. With the investment portfolio being 96% floating rate (LIBOR), interest rate risk from continued Fed rate hikes is limited, and earnings should benefit once benchmark rates in force will have exceeded the interest rate floors by approximately 1% of the investment portfolio.
Stellus’ funding profile has been expanded with a
Capitalization has weakened slightly in recent quarters, despite lower regulatory leverage, which excludes SBA debt, as the company’s overall financial leverage remained at a high level compared to DBRS Morningstar BDC. While Stellus’ regulatory leverage at the end of 2021 was 0.97x the debt-to-equity ratio, financial leverage was high at 1.85x, averaging 1.87x over 2021. Management has a regulatory leverage target of approximately 1.1x. The Company’s cushion against its covenant on the credit facility (1.5x the leverage ratio) has been
A description of how DBRS Morningstar considers ESG factors in the DBRS Morningstar analytical framework is available in DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.
The main methodology is the Global Rating Methodology for Non-Banking Financial Institutions (
Primary sources of information used for this rating include Morningstar Inc. and company documents. DBRS Morningstar considers that the information available to it for the purpose of providing this rating was of satisfactory quality.
The rated entity or its related entities participated in the rating process for this rating metric. 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, conditions that lead to a negative or positive trend assignment are resolved within 12 months. DBRS Morningstar’s outlook and ratings are monitored regularly.
For more information on this credit or this industry, visit www.dbrsmorningstar.com.
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Date Issued Debt Rated Action Rating Trend Attributesi
US = Lead Analyst based in the USA
CA = Lead Analyst based in
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