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 Stable trends. HoldCo’s ratings are notched down from its flagship operating subsidiary, Reliance LP’s (OpCo; rated BBB) ratings, reflecting (1) structural subordination of the parent relative to the operating company, (2) a high degree of leverage at the HoldCo level and (3) reliance on a single operating subsidiary for cash distribution.

DBRS continues to view HoldCo mainly on a standalone basis from its owner, Alinda Capital Partners, as (1) the Company does not require any equity injection from its owner and (2) dividend payments to the owner are discretionary and could be curtailed if necessary. With limited growth opportunities, OpCo is expected to continue to generate predictable cash flow to service debt obligations at HoldCo. While HoldCo’s coupon rate is high at 9.5%, cash distributions from OpCo have provided adequate interest coverage of over three times over the past four years.

Debt at HoldCo has remained the same at USD 350 million since the initial rating was assigned in 2009. The rating assumes that there will be no change in the outstanding balance in the medium term as HoldCo does not have any credit facilities and the debt matures in 2019. Any material incremental debt at the HoldCo level could have negative credit implications as leverage is currently high (41.6% for the 12 months ended September 30, 2013 (LTM Q3 2013)). DBRS’s methodology guidelines provide for more than one notch if the holding company’s debt leverage is above 20%.

DBRS acknowledges that cash flow from OpCo to HoldCo could be restricted as a result of tight covenants on debt at the operating company, including a two-tiered restricted payment test. OpCo is restricted from declaring or distributing to its parent unless the senior adjusted EBITDA/interest ratio is greater than 1.5 times (x) (3.3x LTM Q3 2013). If this requirement is not met, OpCo may still make payments from its Holding Company Debt Payment Account provided that the senior adjusted EBITDA/interest ratio exceeds 1.2x. DBRS does not anticipate these restrictions being triggered in the foreseeable future as the current credit metric significantly exceeds the covenant, and there have been no disruptions in cash flow to HoldCo.

Notes:
DBRS’s rating on Reliance Intermediate Holdings LP is based on the DBRS Methodology Rating Companies in the Consumer Products Industry (October 2013). However, DBRS views Reliance Intermediate Holdings LP’s strong franchise as having a superior business risk profile than that of a traditional consumer products company. As a result, the Company is able to manage higher leverage metrics.

Overall, in DBRS’s assessment of the credit quality of HoldCo, DBRS factors in the following key items: (1) competition arising from regulatory changes; (2) effects of attrition on customer base; (3) stability of cash flow generated from customer base; (4) flexibility to increase rental rates; (5) limited operational risk through a co-ownership agreement; and (6) dependency on new home developments for growth.

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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.