DBRS Morningstar Confirms Issuer Rating and Senior Notes Rating on Reliance Intermediate Holdings LP at BB, Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Notes (the 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 Morningstar), 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. HoldCo does not have any credit facilities, and the Notes matures in 2023.

HoldCo and 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). The Company’s earnings and cash flows both increased in the year, resulting in a strengthening of its key financial metrics. 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 solid growth in the rental base. DBRS Morningstar notes that the debt-to-EBITDA ratio improved to 3.30 times (x), in line with the BBB rating category as at the end of 2019. DBRS Morningstar notes that as the ratings of HoldCo are based on the structural subordination to OpCo, any changes to OpCo’s rating would translate to a change in HoldCo’s ratings. DBRS Morningstar may take a positive rating action for the Company, distinct from OpCo, if the nonconsolidated debt-to-capital ratio is reduced to around 20% (55.0% as at December 31, 2019). Conversely, DBRS Morningstar may take a negative rating action if there is material incremental debt at the HoldCo level. DBRS Morningstar's criteria guidelines provide for more than a one-notch differential if the holding company’s nonconsolidated debt leverage is above 30%.

DBRS Morningstar notes that the Company is 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, OpCo 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, OpCo has instituted prescreening questions before doing maintenance to ensure a safe environment for both customers and staff.

DBRS Morningstar 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 1.5x (5.4x for 2019). 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 Morningstar notes that this restriction is no longer included in the Indenture for new debt issued from 2019 onward; however, as OpCo’s EBITDA interest coverage has consistently been above 4.0x, DBRS Morningstar does not anticipate that these restrictions will be triggered in the foreseeable future.

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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