DBRS Confirms Reliance Intermediate Holdings LP at BB with a Stable Trend

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.

HoldCo’s and OpCo’s operations were steady in 2018, the first full year following the acquisition by Cheung Kong Asset Holdings Limited. The Company’s earnings and cash flows both increased in the year, resulting in a strengthening of key financial metrics. While the debt-to-EBITDA ratio at OpCo remains slightly elevated for its current rating, it is expected to strengthen and be in line with the BBB rating category by the end of 2019. DBRS notes that because the ratings of HoldCo are based on structural subordination to OpCo, any changes to OpCo’s rating would translate to a change in HoldCo’s ratings. A positive rating action for the Company, distinct from OpCo, may occur if the non-consolidated debt-to-capital is reduced to around 20% (59.8% at December 31, 2018). Conversely, a negative rating action may occur if there is material incremental debt at the HoldCo level. DBRS’s criteria guidelines provide for more than a one-notch differential if the holding company’s non-consolidated debt leverage is above 30%.

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 2018). 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 notes that this restriction is no longer included in the Indenture for the debt issued in 2019. However, as OpCo’s EBITDA interest coverage has consistently been above 4.0x, DBRS does not anticipate these restrictions being triggered in the foreseeable future.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodologies are Rating Companies in the Services Industry and DBRS Criteria: Rating Corporate Holding Companies and Their Subsidiaries, which can be found on dbrs.com under Methodologies & Criteria.

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.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

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

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