DBRS Morningstar Confirms the Senior Secured Notes Rating of Reliance LP at BBB (low), Stable Trend

DBRS Limited (DBRS Morningstar) confirmed the Senior Secured Notes rating of Reliance LP (OpCo or the Company) at BBB (low) with a Stable trend. The confirmation is 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.

OpCo’s operations continued to steadily grow in 2019, which marks the second full year following the acquisition by CK Asset Holdings Limited (formerly Cheung Kong Property Holdings Limited). OpCo’s financial risk assessment improved in 2019, with the cash flow-to-debt, debt-to-EBITDA, and EBITDA interest coverage ratios all improving, benefitting from strong growth in the rental base. DBRS Morningstar notes that the debt-to-EBITDA ratio improved to 3.30 times (x) at the end of 2019, in line with the BBB rating category. DBRS Morningstar expects the Company to continue to manage its debt load and distributions in a prudent manner to maintain all key credit metrics in the current rating category. DBRS Morningstar may take a positive rating action if both the cash flow-to-debt and debt-to-EBITDA ratios are maintained at above 27% and at or below 3.0x, respectively, for a sustained period. DBRS Morningstar may take a negative rating action if these two key credit metrics weaken to a level no longer commensurate with the current rating category, such as if there is a significant increase in the debt load.

DBRS Morningstar notes that the Company has so far only been modestly affected by the Coronavirus Disease (COVID-19) pandemic because it is an essential service, not discretionary, and consequently has been relatively insulated from economic cycles. Operationally, the Company has implemented strict procedures for their maintenance staff, with rigorous sanitation as well as the provision of gloves, masks, hand sanitizer, wipes, and disposable shoe covers. Additionally, the Company has instituted prescreening questions before doing maintenance to ensure a safe environment for both customers and staff.

The rating of OpCo additionally reflects (1) its stable rental attrition rate of 3% to 4% (3.7% in 2019), (2) the size and scope of the Company’s water heater and HVAC rental operations in Ontario (approximately 1.9 million rental units in 2019), and (3) the high barriers to entry for new players that prevent them from acquiring meaningful market share. The rental 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 the cash flow generated from this base. DBRS Morningstar notes that if the rental attrition rate rises above 5% over the medium term, this higher-than-anticipated attrition rate could result in a negative rating action.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at https://www.dbrsmorningstar.com/research/357792.

Notes:
The principal methodology is Rating Companies in the Services Industry (February 5, 2020) which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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 [email protected].

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry visit www.dbrsmorningstar.com or contact us at [email protected].

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