DBRS Places Reliance LP and Reliance Intermediate Holdings LP Under Review with Developing Implications

DBRS has today placed Reliance LP’s (OpCo or the Company) Senior Secured Notes and Reliance Intermediate Holdings LP’s (HoldCo) Issuer Rating and Senior Notes Under Review with Developing Implications. This rating action follows the announcement that OpCo has agreed to sell Reliance Protectron Inc. (Protectron) to the ADT Corporation for approximately $555 million (the Disposition). The Disposition is expected to close in summer 2014 pending regulatory approvals. The placement of the ratings Under Review with Developing Implications reflects the uncertainty regarding the use of proceeds from the Disposition.

(1) BUSINESS RISK PROFILE – Modestly Positive
DBRS views the proposed Disposition as modestly positive with respect to the Company’s business risk profile. Approximately 24% of the Company’s earnings are contributed by Protectron (approximately $73 million of $307 million in 2013). The home security business is higher risk than the water heater rental business because of a much higher attrition rate and more intense competition. Following the Disposition, 100% of cash flow will be generated from the cash flow-stable water heater rental business, which also has much lower maintenance capital expenditures than that of the home security business.

(2) FINANCIAL RISK PROFILE – Uncertain
The Under Review with Developing Implications status reflects the uncertainty regarding the Company’s potential use of proceeds from the Disposition. For the year ended December 31, 2013, OpCo’s credit metrics of total debt-to-EBITDA, cash flow-to-debt and EBITDA interest coverage ratios were 3.63 times (x), 22.9% and 5.37x, respectively. To retain its current ratings, DBRS expects OpCo to use the proceeds from the Disposition in a manner that will maintain key credit metrics at or close to the current level. In the event that the use of the proceeds (e.g., a contribution to shareholders) leads to a material deterioration in key credit metrics, negative rating actions may follow.

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.

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

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

Overall, in DBRS’s assessment of the credit quality of the Companies, 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.