DBRS Confirms Reliance LP at BBB, Stable

DBRS has today confirmed the Senior Secured Notes rating of Reliance LP (OpCo or the Company) at BBB with a Stable trend. OpCo’s overall business and financial risk profiles remain within the bounds of the current rating. While the Company’s water heater rental business profile is reflective of a BBB (high) rating, the security business is viewed as riskier, resulting in an overall business risk profile at a BBB rating. The Company’s water heater rental business risk profile reflects the following: (1) relatively stable rental attrition rates, albeit at a rate higher than the Company’s historical levels; (2) the size and scope of the Company’s water heater rental operations in Ontario; and (3) high barriers for new players to build a meaningful market share. DBRS expects OpCo to remain one of the two dominant water heater rental players who, combined, currently represent approximately 90% of the total market share (each player accounts for roughly 45%). OpCo’s security segment is exposed to greater earnings and cash flow volatility because of intense competition, resulting in a high recurring monthly revenue (RMR) attrition rate. The Company’s two primary financial metrics, cash flow-to-debt and EBITDA-interest coverage, remain reasonable for the current rating category. The financial risk profile also takes into account debt at HoldCo, which solely relies on cash distributions from OpCo.

The Stable trend reflects DBRS’s expectations that the water heater rental attrition rate and the security RMR attrition rate will remain at around current levels. The attrition trajectory remains one of the most important credit-driving factors for the Company, as it has direct implications on the size of the customer base and the stability of cash flow generated from this base. Compared with its peers, the water heater rental attrition has been relatively stable, although it remains elevated. This positive attrition rate trend is largely due to the Company’s traditional territory being less-densely populated, resulting in less aggressive direct marketing campaigns by competitors. The enactment of the Stronger Protection for Ontario Consumers Act (Bill 55) in December 2013 should assist the Company in maintaining its rental attrition rate at current levels. However, DBRS believes that for OpCo to decrease its rental attrition rate to historical levels remains a challenge; if the rental attrition rate rises above 5% over the medium term, this higher-than-anticipated churn rate could result in negative rating implications.

Notes:
DBRS’s rating on Reliance LP is based on the DBRS Methodology Rating Companies in the Consumer Products Industry (October 2013). However, DBRS views Reliance 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 OpCo, 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.