DBRS Confirms Reliance LP at BBB (low) with a Stable Trend

DBRS Limited (DBRS) has today confirmed the Senior Secured Notes rating of Reliance LP (OpCo or the Company) at BBB (low) with a Stable trend. The confirmation reflects the stable earnings and cash flows from OpCo’s water heater and HVAC rental business in Ontario, offsetting its weaker financial risk profile. The Stable trend reflects OpCo’s attrition rate, which has stabilized at a more moderate level.

OpCo’s sale of its security business to acquire National Home Services in 2014 has strengthened the Company’s business risk profile moderately. Following the sale, 100% of the Company’s operations are now in the water heater and HVAC business, which should provide more stable earnings and cash flows going forward. While earnings and cash flow have increased meaningfully post-acquisition, the Company’s financial risk profile remains weak for the current rating category. Although the Company’s cash flow-to-debt ratio recovered slightly for 2015 and is reasonable for the current ratings, it is still weaker than before the sale. OpCo’s high debt load has also affected its debt-to-EBITDA ratio, which remained elevated for 2015. The Company’s EBITDA interest coverage ratio continues to be in line with the current rating category. DBRS downgraded OpCo’s ratings to BBB (low) from BBB in March 2015 as a result of the increasing consolidated leverage at the Company and its owner, Reliance Intermediate Holdings LP (rated BB by DBRS), and the aggressive distribution payouts that have limited both companies’ financial flexibility. DBRS expects the Company to manage its debt load and distributions going forward, and grow its earnings and cash flow, in order to maintain or improve its key ratios. Should OpCo’s key credit metrics deteriorate to a level no longer commensurate with the current ratings, a further negative rating action may occur.

The ratings of OpCo additionally reflect (1) its stable rental attrition rate, (2) the size and scope of the Company’s water heater rental operations in Ontario (1.7 million rental units in 2015) and (3) high barriers for new players to build a meaningful market share. The rentals 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. With the enactment of consumer protection legislature (Bill 55) in April 2015, the Company has managed to reduce rental attrition to a more moderate level. DBRS believes that decreasing the 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:
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.

DBRS’s rating on Reliance LP is based on the DBRS Methodology Rating Companies in the Consumer Products Industry (August 2015). 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.