DBRS Downgrades EnerCare Solutions Inc.

DBRS Limited (DBRS) has today downgraded the Issuer Rating and Senior Notes rating of EnerCare Solutions Inc. (ESI or the Company) to BBB from BBB (high). All trends are Stable. The rating actions follow DBRS’s review of ESI’s acquisition of SEHAC Holdings Corporation (Service Experts) for approximately USD 341 million (the Acquisition). The Acquisition closed May 11, 2016 (see the DBRS press release, “DBRS Comments on the Completion of EnerCare’s Service Experts Acquisition,” dated May 12, 2016, for more details).

Pro forma the Acquisition, DBRS estimates the Company’s 2016 cash flow-to-external debt ratio would weaken to approximately 18.0% (21.7% for the 12 months ending March 31, 2016 (LTM 2016)) while its external debt-to-EBITDA ratio would increase to around 3.5 times (x; 3.1x for LTM 2016). DBRS had noted that the Company’s ratings would be downgraded by one notch if the cash flow-to-external debt ratio is below 20% and if the external debt-to-EBITDA ratio is higher than 3.5x following the Acquisition (see the DBRS press release, “DBRS Places EnerCare Solutions Inc. Under Review with Negative Implications,” dated March 8, 2016, for more details). Additionally, DBRS considers earnings and cash flows from Service Experts to be less stable than ESI’s core water heater and HVAC rental business, and could potentially result in more volatile earnings going forward.

DBRS expects the Company to manage its debt load and distributions, and grow its earnings and cash flow, in order to improve its key credit metrics to a level commensurate with the current rating category. Should ESI’s cash flow-to-external debt and external debt-to-EBITDA ratios remain, respectively, below the 20% and above the 3.5x threshold for the BBB rating category, further negative rating action may occur.

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 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.