DBRS Places EnerCare Solutions Inc. Under Review with Negative Implications

DBRS Limited (DBRS) has today placed EnerCare Solutions Inc.’s (ESI or the Company) Issuer Rating and Senior Notes rating Under Review with Negative Implications. The rating actions follow the announcement that ESI has entered into a definitive merger agreement to acquire SEHAC Holdings Corporation (Service Experts) for approximately USD 341 million (the Acquisition). The Acquisition is expected to close in Q2 2016, pending regulatory approvals. DBRS notes that the Acquisition will be funded through the issuance of approximately CAD 218 million of equity and USD 200 million of debt.

(1) BUSINESS RISK PROFILE – Negative
Based on a preliminary review of the transaction, DBRS views the Acquisition as negative with respect to ESI’s business risk profile. DBRS notes that ESI’s current water heater rental business in Ontario provides very stable earnings and cash flows to the Company. Pro forma the Acquisition, DBRS estimates that Service Experts would have accounted for approximately 13% of EBITDA and 16% of cash flow from operations in 2015. Service Experts, which has operations in 29 U.S. states and three Canadian provinces, primarily provides residential and commercial heating, ventilation and air conditioning service, replacement and installation. DBRS considers the stability of the earnings and cash flows from Service Experts to be more volatile than ESI’s core business as they are typically not on a long-term contracted or recurring basis. As such, DBRS views the quality of ESI’s earnings and cash flows to potentially be weaker following the Acquisition.

(2) FINANCIAL RISK PROFILE – Negative
DBRS views the Acquisition as negative to ESI’s financial risk profile. Based on 2015 results and pro forma the Acquisition, DBRS estimates that ESI’s key credit metrics would be weak for the current rating category with the cash flow-to-debt ratio slightly below 20% and the debt-to-EBITDA ratio higher than 3.5 times (x; currently 22.5% and 3.17x, respectively, in 2015). DBRS will continue to review the Acquisition and will resolve the Under Review rating action once the transaction closes. The Company’s ratings would be downgraded by one notch if the cash flow-to-debt ratio is below 20% and if the debt-to-EBITDA ratio is higher than 3.5x following the Acquisition.

Notes:
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 rating on ESI is based on the DBRS methodology Rating Companies in the Consumer Products Industry (August 2015). However, DBRS views ESI’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 ESI, 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; and (5) dependency on new home developments for growth.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.