NEW YORK--(BUSINESS WIRE)--Kroll Bond Rating Agency (KBRA) has assigned an issuer rating of A+ and Preferred Shares rating of BBB+ to StoneCastle Financial Corp. (“SCFC”). The ratings reflect SCFC’s Preliminary Closed-End Fund Rating (P KScore) as measured by the key Closed-End Fund (CEF) Rating Determinants, including the CEF’s PQR, based on the KBRA Credit Quality Rating Matrix (as measured by the credit quality of the underlying instruments that comprise the portfolio); Asset Coverage; Liquidity; and Duration. Additionally, the ratings are influenced by the results of the qualitative assessment of SCFC’s investment advisor, StoneCastle Asset Management, LLC (“SCM”). The qualitative shadow rating (QSR) for the investment advisor was found to be strong. This produced an Intermediate K Score (I KScore) and Final CEFR of A+ for the issuer rating and, after a priority of claim adjustment, a BBB+ final CEFR for the preferred shares, which to date have not been issued and are not currently outstanding.
StoneCastle Financial Corp. was organized as a Delaware corporation in February 2013 as a non-diversified, closed-end investment company by its sponsor SCM, a wholly owned subsidiary of StoneCastle Partners, LLC (“StoneCastle”). SCFC commenced operations on November 13, 2013, and its common shares are listed on the NASDAQ Global Select Market under the symbol BANX. As of December 31, 2016, SCFC has approximately $206 million in assets under management (AUM), with total leverage, in the form of a revolving credit facility, of around $62 million.
SCFC’s primary investment objective is to provide shareholders with current income, and to a lesser extent, capital appreciation by investing at least 80% of its net assets plus any borrowings in banks and banking-related businesses. More specifically, SCFC will attempt to achieve its investment objectives through investments in preferred stock, senior and subordinated debt, term loans, convertible securities and common equity on the bank sector, with an emphasis on community banks.
SCFC operates under certain investment parameters and guidelines, and per those guidelines, expects to invest at least 80% of its total assets in banking-related securities. Refining that investment guideline further, management intends to invest principally in public and privately-held community banks located throughout the United States, with internal restrictions detailing asset sizes, business models and geographies. Management defines a “community bank” to mean banks, savings associations and their holding companies with less than $10 billion in consolidated assets that serve local markets.
SCFC is allowed, per the 1940 Investment Company Act (’40 Act) and its prospectus, to utilize leverage as it seeks to meet its investment objectives. SCFC’s targeted leverage, in the form of an advantageous mix of notes, revolving credit facility, and preferred shares, of 30% of total assets currently is comprised entirely of a revolving credit facility. As of December 31, 2016, management reported SCFC as having outstanding borrowings under the credit facility of approximately $62 million, equaling total leverage of around 30%.
Under the ‘40 Act, SCFC is not permitted to borrow (senior debt) unless immediately after the borrowing the value of fund total assets (less all liabilities not represented by indebtedness and preferred shares) is at least 300% of the principal amount of the borrowings. Additionally, under the ‘40 Act, SCFC is not permitted to issue preferred stock unless immediately after such issuance the value of its asset coverage is at least 200% of the liquidation value of the outstanding indebtedness and preferred shares. As of December 31, 2016, SCFC had total borrowings of $61.5 million on the $70 million secured revolving credit facility. This equates to a reported asset coverage for the outstanding borrowings of 325%, well above ‘40 Act minimum requirements for senior debt asset coverage of 300%.
Founded in 2012, SCM is a wholly owned subsidiary of StoneCastle, which was initially formed in 2003 as a means to help forge a connection between institutional investors and the community banking industry. Today, StoneCastle reports having over 60 employees, over $12.0 billion in assets ($10.5 billion in institutional cash/deposit funding, and $1.6 billion in fixed income/capital investments); over 1,200 institutional accounts, and a network of over 800 relationship banks.
The ratings are based on KBRA’s Global Investment Funds Rating Methodology published on August 10, 2016.
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