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 reflects the OpCo’s solid water heater and HVAC rental business ,which delivers stable earnings and cash flow. The Stable trend reflects DBRS Morningstar’s expectations that the Company will continue to deliver strong operating results and that credit metrics should remain within the current range in the near to medium term. The ratings are supported by the Company’s ability to generate steady earnings and cash flows, the size and scope of the Company’s operations in Ontario, and the high barriers for new players to build a meaningful market share. The Company provides essential services that are largely insulated from economic cycles.

The Company delivered strong operational performance in F2022. Revenue grew by 10% year-over-year, supported by a growing customer base, with stable recurring monthly revenue from water heating and HVAC unit rentals, as well as complementary services. The Company also achieved improvement in the annual attrition rate, as fewer customers initiated unit retirement. OpCo has been growing its presence outside of Canada, mainly through small acquisitions. Its U.S. revenues increased to 9% in F2022, up from 7% in F2021, reflecting a steady commitment to geographic diversification and portfolio growth. DBRS Morningstar expects the Company to continue to grow its revenue while maintaining its EBITDA margin, supported by its stable flow of rental income and new product offerings, partially offset by SG&A inflation. DBRS Morningstar also expects the rental attrition rate to remain under 5% (3.9% in F2022) in the medium term.

OpCo's debt-to-EBITDA ratio was 3.34 times (x) in F2022, a marginal improvement from 3.36x in F2021. DBRS Morningstar expects that the Company will continue to manage its debt load and distributions in a prudent manner, with some deleveraging expected, albeit at a moderate pace. Key credit metrics are expected to remain in the current rating category for F2023 and F2024 and improve thereafter. DBRS Morningstar may take a positive rating action if the Company establishes a stronger market position outside of Ontario, in combination with the cash flow-to-debt and debt-to-EBITDA ratios that are maintained at or above 25% 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). Furthermore, rental attrition 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. While not currently anticipated, if rental attrition rate rises above 5% over a sustained period, this higher-than-anticipated attrition rate could result in negative rating implications.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.

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/396929 (May 17, 2022).

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

DBRS Morningstar applied the following principal methodology:
-- Global Methodology for Rating Companies in the Services Industry (https://www.dbrsmorningstar.com/document/409773; February 14, 2023).

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223.

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 rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

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

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at [email protected].

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