DBRS Confirms Enercare Solutions Inc. at BBB with Stable Trends

DBRS Limited (DBRS) confirmed the Issuer Rating and Senior Notes rating of Enercare Solutions Inc. (Enercare or the Company) at BBB with Stable trends. The confirmations are based on Enercare’s stable portfolio of water heater and HVAC rental units, mostly based in Ontario. The Stable trends reflect the attrition rate, which has stabilized at around 3% and which DBRS has assumed for the current ratings. However, DBRS is concerned with the Company’s key credit metrics, specifically the cash flow-to-external debt and external debt-to-EBITDA ratios, which remain weak for the current ratings.

Enercare’s business risk profile continues to be supported by its water heater and HVAC rental business (approximately 65% of EBITDA), which provides the Company with a stable recurring stream of earnings and cash flows. Enercare’s financial risk profile, however, remains weak. As noted in the most recent Enercare rating report dated March 8, 2017, DBRS expected the Company’s cash flow-to-external debt ratio and external debt-to-EBITDA ratio to weaken to 18% and 3.5 times (x), respectively, for 2016, as the Service Experts acquisition completed in May 2016 increased debt by USD 200 million but would only contribute seven and a half months of cash flow. For 2016, the Company’s cash flow-to-external debt ratio fell to 17.6%, while the external debt-to-EBITDA ratio increased to 3.54x, in line with DBRS’s expectations. For the last 12 month ended September 30, 2017, however, Enercare’s cash flow-to-external debt ratio improved to 19.2%, but the external debt-to-EBITDA ratio further weakened to 3.65x. DBRS expects the Company to manage its debt load and distributions in order to strengthen both these key credit metrics back to the BBB rating category (cash flow-to-external debt above 20% and external debt-to-EBITDA below 3.5x) in 2018. Should these two key credit metrics remain below the threshold for the BBB rating category, a negative rating action could occur.

The current ratings of Enercare assume that the Company’s rental base will remain at over one million customers (currently at around 1.1 million). The rentals attrition trajectory continues to be 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, two of the primary elements that underpin the current rating category. DBRS believes that decreasing the attrition rate to historical levels of approximately 2% will remain challenging for Enercare and has incorporated this into the current ratings. Furthermore, if the attrition rate rises above 5% over the medium term, this higher-than-anticipated churn rate could result in negative rating implications.

Notes:
The principal methodology is Rating Companies in the Consumer Products Industry (August 2017), which can be found on dbrs.com under Methodologies. However, DBRS views Enercare’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 Enercare, 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 the customer base, (4) flexibility to increase rental rates and (5) dependency on new home developments for growth.

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 under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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