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 rating 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 with steady growth in 2021 despite the Coronavirus Disease (COVID-19) pandemic. OpCo’s financial risk assessment remained stable in 2021, with the cash flow-to-debt and debt-to-EBITDA ratios supporting the BBB rating range, while EBITDA interest coverage improved to 9.46 times (x) from 8.73x, benefitting from strong growth in the rental base. DBRS Morningstar notes that OpCo's debt-to-EBITDA ratio was 3.36x at the end of 2021. DBRS Morningstar expects the Company will continue to manage its debt load and distributions in a prudent manner, with some deleveraging expected. Key credit metrics are expected to remain in the current rating category for 2022 and improve thereafter. 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 3.0x or below, 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 (for example, if there is a significant increase in the debt load).

DBRS Morningstar notes that the Company has been only modestly affected by the coronavirus pandemic because its business is considered essential (per government guidelines), rather than discretionary, and has been relatively insulated from economic cycles. Operationally, during 2021, the Company continued to implement strict procedures for its technician field teams, with rigorous sanitation, as well as providing gloves, masks, hand sanitizer, wipes, and disposable boot covers. Additionally, the Company instituted prescreening questions before doing maintenance to ensure a safe environment for its customers and staff.

The ratings of OpCo additionally reflect (1) its stable rental attrition rate under 5% (4.5% in 2021), (2) the size and scope of the Company’s water heater and HVAC rental operations in Ontario (approximately 1.98 million rental units in 2021), and (3) high barriers for new players to build a 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 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 negative rating implications.

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 28, 2022, https://www.dbrsmorningstar.com/research/391428), 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).

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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