DBRS Confirms Reliance Intermediate Holdings LP at BB (high), Stable

DBRS has today confirmed the Senior Notes rating of Reliance Intermediate Holdings LP (HoldCo or the Company) at BB (high) with a Stable trend. The rating confirmation reflects the strong operating characteristics of HoldCo’s subsidiary Reliance LP (OpCo), largely driven by the water heater rental and HVAC (heating, ventilation, and air conditioning) businesses, which account for the majority of OpCo’s EBITDA, coupled with financial and structural considerations.

The strength of OpCo is predominantly reflected in the stable cash flow stream generated from the water heater and HVAC business segment, which services a portfolio of more than 1.3 million rental water heaters in Ontario. In addition, this segment has related activities that complement the water heater rental business, including the retail sale, rental, service and maintenance, and financing of HVAC equipment. The Company’s security segment has been growing, with the number of customers reaching approximately 370,000. The Company provides residential and commercial electronic security system sales, installation, service, monitoring, and related commercial activities across Canada. HoldCo has reasonably modest business risk due to OpCo’s stable customer base, and a relatively stable financial profile.

The risk of this underlying business is viewed as moderate, given its established presence in the Ontario market, the value proposition offered to customers, high customer retention rates and its non-cyclical nature. Maintenance capital expenditures are significant and predominantly reflect the cost of preserving the long-term operation of the existing water heater assets. These maintenance capital expenditures, however, remain stable and predictable, thus reducing the volatility of free cash flows. OpCo also benefits to an extent from the modest diversification provided by the security and HVAC businesses. While the security business carries higher volatility than the water heater and HVAC rental businesses, its contribution has been increasing, and the risk is viewed as manageable for the assigned rating.

Rating considerations largely focus on the ability of OpCo to service its substantial financial obligations given the strong cash flow from the underlying business operations and its ability to make stable distributions to HoldCo. Holdco’s ability to service the HoldCo Notes is entirely dependent on distributions from OpCo. Holdco’s rating of BB (high) incorporates its 100% interest in OpCo’s strong operating businesses (which is reflected in the stable cash flow stream generated from the water heater and HVAC business segments), as well as its subordinate position to OpCo’s debt.

HoldCo began using International Financial Reporting Standards (IFRS) in 2011. DBRS notes that there is no material impact as a result of the accounting change.

Note:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating the Consumer Products Industry, which can be found on our website under Methodologies.