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

DBRS has today confirmed the Senior Notes rating of Reliance Intermediate Holdings LP (HoldCo or the Company) with a Stable trend. The confirmation reflects good cash distributions from its operating subsidiary, Reliance LP (OpCo), which owns and operates one of the largest water heater rental business in Ontario and the second largest security monitoring business in Canada. The BB (high) rating of HoldCo is based on the credit quality of Reliance LP and reflects the following factors: (1) the debt at HoldCo is structurally subordinated to the debt at Reliance LP; (2) the non-consolidated debt in the capital structure of Holdco at 35% at year-end 2011 was viewed as high for a holding company which relies on a single source of cash flow; and (3) tight covenants on the debt at Reliance LP that could potentially restrict Reliance LP from making distributions to the Company.

Reliance LP’s stable and strong cash flow is supported by its large water heater customer base (approximately 1.3 million) and a sizable security monitoring customer base (approximately 378,000). This has enabled OpCo to make good cash contributions to HoldCo over the past two years. Despite increasing competition due to new entrants in the marketplace, OpCo’s customer base experienced modest growth as customer acquisitions outpaced customer attrition. In addition, OpCo’s cash flow is also supported by earnings diversification, as its security monitoring business contributed approximately 22% of 2011 EBITDA. OpCo is expected to generate free cash flow deficits over the near-to-medium term as capital expenditures, acquisitions and distributions to HoldCo remain high. DBRS expects the Company to remain prudent in financing the deficits in order to maintain its consolidated and non-consolidated debt leverage within DBRS’s BB (high) rating range.

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