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

DBRS has today confirmed the Issuer Rating and the Senior Notes rating of Reliance Intermediate Holdings LP (HoldCo or the Company) at BB (high) with a Stable trend. The ratings reflect the Company’s stable credit profile and are based on the credit quality of its subsidiary, Reliance LP (OpCo; rated BBB, Stable), which is the only source of cash flow from which the Company can service its debt.

The credit quality of OpCo is supported by the stable cash flow and strong operating characteristics of its water heater rental and HVAC businesses (77% of 2012 EBITDA), which benefit from a large customer base (approximately 1.3 million). Although OpCo has experienced an increase in its attrition rate over the past five years (4.7% in 2012 versus the five-year average rate of 3.2%), net customer growth has remained positive as new customer additions through acquisitions and new housing starts offset the loss of customers from attrition. In addition, despite entailing higher risk, OpCo’s second line of business, the security monitoring operations, provides some diversification benefits (23% of EBITDA) and benefits from a large customer base of approximately 393,000 customers, with approximately 85% recurring monthly revenues (RMR).

The BB (high) rating of HoldCo is limited by the following factors: (1) structural subordination of HoldCo debt to the debt of Reliance LP; (2) a high non-consolidated debt and consolidated debt-to-capital ratio for a holding company (at 37.8% and 69.9%, respectively, as at December 31, 2012); and (3) tight covenants on the debt of Reliance LP that could potentially restrict Reliance LP from making distributions to the Company, although there are less restricted covenants that permit distributions for interest payments.

OpCo is expected to generate free cash flow deficits over the near-to-medium term due to high capital expenditures, acquisitions and distributions to HoldCo. DBRS expects OpCo to fund its free cash flow deficits at the OpCo level. Any material increase in debt at HoldCo could result in negative credit implications as the Company has limited flexibility to support additional debt at the HoldCo level. DBRS also expects the Company to maintain its consolidated cash flow-to-debt ratio around the current level. In December 2012, OpCo mitigated its refinancing risk by repaying existing indebtedness with the Senior Secured Notes issuances ($700 million in aggregate). Going forward, consolidated credit ratios are expected to benefit from lower future interest costs.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

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