DBRS Comments on Reliance Acquisition of National Home Services

DBRS notes that Reliance LP (OpCo or the Company; rated BBB, Under Review with Developing Implications) has today announced the acquisition of National Home Services (NHS) from Just Energy Group, Inc. for $505 million (the Acquisition). The Acquisition is expected to close in Q4 2014 pending regulatory approval. After the Acquisition, OpCo’s customer base will increase by approximately 20% to around 1.6 million units from 1.4 million units. DBRS expects the proceeds of approximately $555 million from the disposition of the security business (the Disposition; see DBRS press release “DBRS Places Reliance LP and Reliance Intermediate Holdings LP Under Review with Developing Implications,” dated April 30, 2014) to largely be used to fund the Acquisition. DBRS will continue to monitor developments and reassess whether the Acquisition will be aligned with current expectations. Should the Acquisition be executed as DBRS expects, the ratings will likely be removed from Under Review with Developing Implications. However, any significant deviations could result in negative rating actions.

(1) BUSINESS RISK PROFILE -- Positive
DBRS views the Acquisition as positive for OpCo’s business risk profile as it further strengthens the Company’s position as one of the leading water heater, and heating, ventilation and air conditioning rental businesses in Ontario. The incremental EBITDA from NHS ($43 million in fiscal 2014) will largely replace the earnings previously contributed by the Company’s higher risk security division. The water heater rental business is viewed as less risky than the home security business because of its much lower attrition rate and less intense competition. Additionally, maintenance capital expenditures are also lower for the water heater business than the home security business. As a result, OpCo’s earnings and cash flow are expected to be more stable following the Disposition and Acquisition.

(2) FINANCIAL RISK PROFILE -- Uncertain
The impact of the Acquisition on OpCo’s financial risk profile remains uncertain as the financing plan is yet to be finalized. DBRS notes that the Company is currently in the process of selling its security segment to the ADT Corporation for approximately $555 million. The Disposition is expected to close in summer 2014 before the closing of the Acquisition. DBRS will likely remove the ratings of OpCo and its parent, Reliance Intermediate Holdings LP (rated BB (high), Under Review with Developing Implications), from Under Review with Developing Implications following the closing of the Disposition and Acquisition if the proceeds from the Disposition are largely used to fund the Acquisition. Any significant deviations that result in a material deterioration to the Company’s credit profile could result in negative rating actions.

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

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) and Rating Holding Companies and Their Subsidiaries (January 2014). 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.

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