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

DBRS Limited (DBRS) confirmed the Senior Secured Notes rating of Reliance LP (OpCo or the Company) at BBB (low) with Stable trends. The confirmation was based on the stability of OpCo’s water heater and HVAC rental business in Ontario, which generates steady earnings and cash flows for the Company. The Stable trend reflects the attrition rate of the Company, which has now stabilized at a more moderate level.

On July 13, 2017, Cheung Kong Asset Holdings Limited acquired OpCo and its parent, Reliance Intermediate Holdings LP (rated BB with a Stable trend by DBRS), for an equity value of $2.82 billion. DBRS had noted in its most recent report for OpCo that it expected the distribution policy for the Company will be more flexible going forward, resulting in a more sustainable level of distributions to the new parent. 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 continue to strengthen over the medium term. DBRS notes that while the Company’s cash flow-to-debt and EBITDA interest coverage ratios are in line with the BBB rating category, its debt-to-EBITDA ratio historically remained elevated. Through managing its debt and by growing earnings, this key metric has improved significantly since 2014. DBRS expects OpCo to continue to manage its debt load and distributions in a prudent manner, and to grow its earnings and cash flows in order to improve this key ratio.

The ratings of OpCo additionally reflect (1) its stable rental attrition rate, (2) the size and scope of the Company’s water heater and HVAC rental operations in Ontario (approximately 1.8 million rental units in 2017) 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. 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 principal methodology is Rating Companies in the Consumer Products Industry (August 2017), which can be found on dbrs.com under Methodologies. 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 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.

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