DBRS Updates Report on Reliance Intermediate Holdings LP

DBRS has today updated its report on Reliance Intermediate Holdings LP (HoldCo or the Company). The credit profile of HoldCo has remained relatively stable. However, the Company’s operating subsidiary, Reliance LP (OpCo), faces refinancing risk as approximately $550 million, 44% of the Company’s total consolidated debt, is due in the first half of 2013. The BB (high) rating of HoldCo is based on the credit profile of OpCo since this entity is the only source of cash flow for the Company to service its debt. The Company’s current rating also reflects the following factors: (1) the debt at HoldCo is structurally subordinated to the debt at Reliance LP; (2) the non-consolidated debt and consolidated debt in the capital structure of HoldCo (at 36.4% and 67.1%, respectively, at June 30, 2012) are viewed as high for a holding company; and (3) the tight covenants on the debt at Reliance LP could potentially restrict Reliance LP from making distributions to the Company, although there are less restricted covenants that permit distributions for interest payments.

Reliance LP owns and operates one of the largest water heater rental businesses in Ontario (approximately 1.3 million customers) and the second largest security monitoring business in Canada (approximately 378,000 customers). Most of its revenues are monthly recurring, contributing to stable earnings and cash flow. This has enabled OpCo to make good cash contributions to HoldCo since 2010. 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 debt leverage below 70%.

Notes:
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.