DBRS Morningstar Confirms Issuer Rating on Reliance Intermediate Holdings LP at BB, Stable Trend

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating of Reliance Intermediate Holdings LP (HoldCo or the Company) at BB with a Stable trend. The rating is notched down from HoldCo’s 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 relatively high level of leverage at HoldCo, and (3) reliance on a single operating subsidiary for cash distributions.

HoldCo fully repaid the Senior Notes due in 2023 using part of the proceeds from the issuance of the 2027 Reliance LP Notes in August 2020 and from three individual Senior Secured Term Loan Credit Facilities (the Term Loans) in June 2020. The Term Loans rank pari passu in right of payment with all of HoldCo's present and future other secured and unsubordinated indebtedness, and are not rated by DBRS Morningstar.

HoldCo and OpCo’s operations continued with steady growth in 2020, the third full year following the acquisition by Cheung Kong Asset Holdings Limited, despite the Coronavirus Disease (COVID-19) pandemic. The Company’s earnings and cash flows both increased in the year, resulting in a strengthening of the key financial metrics. OpCo’s financial risk assessment improved marginally in 2020, with the cash flow-to-debt and debt-to-EBITDA ratios improving slightly, while EBITDA interest coverage ratios improved more significantly, benefitting from solid growth in the rental base. DBRS Morningstar notes that OpCo’s debt-to-EBITDA ratio was 3.29 times (x) at the end of 2020. DBRS Morningstar further notes that, as the rating of HoldCo is based on the structural subordination to OpCo, any changes to OpCo’s rating would translate to a change in HoldCo’s rating. 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% (45.4% at December 31, 2020, down from 55.0% 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 HoldCo's nonconsolidated debt leverage is above 30%.

DBRS Morningstar notes that the Company has been only modestly affected by the coronavirus pandemic because OpCo's business is considered essential (per government guidelines), rather than discretionary, and has been relatively insulated from economic cycles. Operationally, OpCo has implemented strict procedures for their technician field teams, with rigorous sanitation, as well as providing gloves, masks, hand sanitizer, wipes, and disposable booties. Additionally, OpCo instituted prescreening questions before doing maintenance to ensure a safe environment for its 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. OpCo is restricted from declaring or distributing to its parent unless the senior adjusted EBITDA-to-interest ratio is greater than 1.5x (5.6x for 2020). 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 (4.0x for 2020). DBRS Morningstar notes that this restriction is no longer included in the Indenture for new debt issued from 2019 onwards; however, as OpCo’s EBITDA interest coverage has been consistently 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 can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodology is Rating Companies in the Services Industry (January 29, 2021, https://www.dbrsmorningstar.com/research/372947), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021, https://www.dbrsmorningstar.com/research/373262).

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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