DBRS cuts Stellus unit

DBRS said it downgraded the long-term issuer rating and long-term senior debt rating of Stellus Capital Investment Corp. BBB (low) from BBB and revised the trend to stable from negative.

“The credit ratings downgrade is based on the sustained elevated financial leverage at Stellus. While regulatory relief excludes Small Business Association debentures (SBA debt) from its regulatory asset coverage ratio, ultimately it has to be paid off at maturity and is the source of the company's higher financial leverage compared to our BDC peers.

“Other BDCs with SBA debt have broader funding or larger investment portfolios which make the difference between regulatory leverage and financial leverage significantly lower. The credit ratings action also considers Stellus' credit performance with a non-accrual level that is in line with BBB (low) rated BDC peers while equity gains have offset most realized losses historically,” the agency said in a press release.

On the positive side, the company benefits from its connection to Stellus Capital Management with about $2.9 billion in assets under management as of the fourth quarter of 2023, the agency said.

“The stable trend reflects our view that while the company will continue to operate with elevated financial leverage due to its reliance on SBA funding, this debt benefits from lower interest costs and a longer duration than other funding sources while providing a significant buffer to the regulatory asset coverage ratio,” DBRS said.

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