DBRS Confirms Reliance Intermediate Holdings LP at BB with Stable Trends

DBRS Limited (DBRS) confirmed the Issuer Rating and Senior Notes rating of Reliance Intermediate Holdings LP (HoldCo or the Company) at BB with Stable trends. The ratings of HoldCo are notched down from its operating subsidiary, Reliance LP (OpCo; rated BBB (low) with a Stable trend by DBRS), reflecting (1) structural subordination of debt at HoldCo relative to OpCo, (2) the high level of leverage at HoldCo and (3) reliance on a single operating subsidiary for cash distributions. The current ratings of the Company 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 (60.0% at December 31, 2017). DBRS’s criteria guidelines provide for more than a one-notch differential if the holding company’s non-consolidated debt leverage is above 30%.

On July 13, 2017, Cheung Kong Asset Holdings Limited acquired the Company for an equity value of $2.82 billion. DBRS continues to view HoldCo on a stand-alone basis from its owner, as (1) the Company does not require any equity injections from its owner and (2) distributions to the owner are discretionary and could be curtailed if necessary. DBRS had noted in its most recent report for HoldCo that it expected the distribution policy for the Company and for OpCo will be more flexible going forward, resulting in a more sustainable level of distributions to the new owner. While the Company now expects to continue funding capital expenditures and distributions partly through debt financing, it is forecast to be more moderate than under the previous owners. As such, OpCo’s key credit metrics are expected to strengthen over the medium term.

DBRS 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-to-interest ratio is greater than 1.5 times (x; 4.8x for 2017). If this requirement is not met, OpCo may still make payments to service HoldCo interest amounts provided that the senior adjusted EBITDA-to-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 principal methodologies are Rating Companies in the Consumer Products Industry (August 2017), and the DBRS criteria Rating Holding Companies and Their Subsidiaries (December 2017), which can be found on dbrs.com under Methodologies. 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 the 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.