DBRS Confirms Reliance Intermediate Holdings LP at BB with Stable Trends

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Notes rating of Reliance Intermediate Holdings LP (HoldCo or the Company) at BB with Stable trends. HoldCo’s ratings are notched down from its operating subsidiary, Reliance LP (OpCo; rated BBB (low) by DBRS), reflecting (1) structural subordination of the parent relative to the operating company, (2) a high degree of leverage at the HoldCo level and (3) reliance on a single operating subsidiary for cash distributions. DBRS also views HoldCo on a stand-alone basis from its owner, Alinda Capital Partners LLC, as (1) the Company does not require any equity injection from its owner and (2) dividend payments to the owner are discretionary and could be curtailed if necessary.

In 2015, HoldCo refinanced its outstanding debt with USD 375 million 6.5% Senior Secured Notes. DBRS notes that although the interest rate is significantly lower than the previous 9.5% notes and will decrease interest payments by approximately USD 9 million annually going forward, the Company incurred $23 million of make-whole premium for the early redemption. The current ratings assume that there will be no material change in the outstanding debt balance in the medium term as HoldCo does not have any credit facilities and the debt matures in 2023. Any material incremental debt at the HoldCo level could have negative credit implications as non-consolidated leverage is high (69.3% at December 31, 2015). DBRS’s methodology guidelines provide for more than a one notch differential if the holding company’s debt leverage is above 30%.

HoldCo’s ability to make interest payments on its debt is based on the cash distributions from OpCo. OpCo sold its security business and used the proceeds to purchase National Home Services in 2014. DBRS notes that the sale and acquisition are modestly positive as the Company’s operations are now only in the water heater and HVAC business, which should provide more stable cash flows going forward. However, the high debt load at both HoldCo and OpCo, along with the aggressive distribution payouts, has limited the Companies’ financial flexibility. DBRS further acknowledges that cash flow from OpCo to HoldCo could be restricted as a result of tight covenants on debt at OpCo, including a two-tiered restricted payment test. OpCo is restricted from declaring or distributing to its parent unless the senior adjusted EBITDA/interest ratio is greater than 1.5 times (x) (3.6x for 2015). If this requirement is not met, OpCo may still make payments to service HoldCo interest amounts provided that the senior adjusted EBITDA/interest ratio exceeds 1.2x. DBRS does not anticipate these restrictions being triggered in the foreseeable future as the current credit metric significantly exceeds the covenant, and there have been no disruptions in cash flow to HoldCo.

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 ratings on Reliance Intermediate Holdings LP are based on the DBRS methodologies Rating Companies in the Consumer Products Industry (August 2015) and Rating Holding Companies and Rating Holding Companies and Their Subsidiaries (January 2016). However, DBRS views Reliance Intermediate Holdings 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 HoldCo, 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.