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

DBRS Limited (Morningstar DBRS) confirmed the rating of Reliance LP's (Reliance or the Company) Senior Secured Notes rating at BBB (low) and changed the trend on the rating to Positive from Stable.

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmation acknowledge Reliance's steady growth in the core rental business and strong operating cash flows in the past year. The Company's performance reflects its growing footprint in the long-term home services rental and maintenance businesses, increasing penetration of high-value HVAC unit rentals and over 80% recurring monthly revenues. The Positive trend reflects Morningstar DBRS' expectations that the Company's operations will continue to grow earnings, supported by a combination of tuck-in acquisitions outside of Ontario and growth in the high-margin rental mix. The trend also reflects Morningstar DBRS' view that Reliance will be able to navigate the uncertain operating environment and near-term headwinds linked to the U.S. trade tariffs and trade policy developments because of its utility-like essential services and strong supplier relationships and that it will be able to maintain a stable financial risk assessment.

Reliance has been executing its plan to relocate its holding company debt onto its balance sheet, and as a result, debt-to-EBITDA increased to levels above 3.5 times (x) in 2024. That said, Morningstar DBRS expects leverage to trend downward beginning in 2026, supported by the Company's earnings and operating cash flow growth. In 2024, Reliance's revenue grew by 1.8% year over year (YOY) to $1.1 billion. The top-line performance was supported by a 5.6% growth in rental revenue and offset by a 7.3% decline in sales and other services (which accounted for approximately 30% of sales) because of changes in government incentives related to sales in Canada. Morningstar DBRS-adjusted EBITDA increased by 3.0% YOY to approximately $586 million, moderately below expectations, reflecting the impact of the weaker performance of the noncore sales segment. The attrition rate was moderately higher at 4.5% versus 3.9% in 2023; that said, customer-initiated attrition has been below 2.5% in the past 10 years. The Company's free cash flow was a deficit of over $200 million, driven by approximately $180 million in distributions to the holding entity for debt consolidation and streamlining of Reliance's financing structure and an increase in capital expenditure (capex) of 8% YOY.

CREDIT RATING DRIVERS
Morningstar DBRS may upgrade the credit ratings of Reliance if the Company delivers stable improvements in its earnings and operational cash flow, such that forward-looking debt-to-EBITDA trends down and remains below 3.5x in the medium term. This expectation, reflected by the Positive trend, is supported by growing earnings contribution from tuck-in acquisitions and a favorable revenue mix with a growing proportion of monthly rentals.

Conversely, while not likely in the medium term, Morningstar DBRS may take negative credit rating action if the financial risk profile weakens to a level no longer commensurate with the current rating category (i.e., debt-to-EBITDA above 4x) and/or operational performance, including rental attrition, is materially below Morningstar DBRS' expectations for a sustained period.

EARNINGS OUTLOOK
Morningstar DBRS expects mid-single-digit revenue growth in 2025, attributed to a stable performance in the water heater and HVAC rental businesses. The growth expectations are supported by a 3.5% annual increase in rental fees; moderate growth in the portfolio of rental assets, particularly for HVAC; and growing penetration of customer protection plans. Extended softness in the residential property market can have a negative impact on the water heater rental units; this is expected to be offset by operational growth outside of Ontario, particularly in Georgia and Florida, which currently contribute approximately 11% of total revenue. The rental attrition rate is expected to remain under 5%, reflecting strong operational execution and customer relationships, notwithstanding challenging economic conditions. EBITDA is expected to be in a range of $600 million to $620 million and EBITDA margins are expected to moderately soften by approximately 70 basis points (bps) to 100 bps but remain above 50%, reflecting some import-tariff related price inflation on parts and inventories related to the HVAC business.

In the medium term, Morningstar DBRS expects Reliance's earnings profile will strengthen. This is supported by a gradual shift in the product mix to advanced tankless water heaters and HVAC units and a conversion from a sale to a rental model outside Ontario. The impact of changes in government-linked incentives and rebates is expected to normalize in 2025.

FINANCIAL OUTLOOK
Morningstar DBRS expects cash flow from operations growth to trend in line with earnings. Total capex is expected to remain in the approximately $240 million to $270 million range to support business growth expectations. A part of capex may also be inflated by higher costs passed by HVAC unit manufacturers in the U.S. Distributions paid to the holding companies (excluding distribution for the settlement of holding company debt) are expected to be relatively flat or moderately lower YOY, reflecting financial policy flexibility in times of uncertainty. Changes in working capital are not a substantial source or use of cash. Free cash flow is expected to be moderately negative, affected by distributions. Reliance is expected to maintain its current debt structure and may make moderate debt increases to fund small acquisitions and the remainder of holding company debt.

CREDIT RATING RATIONALE
Comprehensive Business Risk Assessment (CBRA): BBB/BBBL
Reliance's business risk assessment reflects the Company's apparent strengths in the home services across North America. The Company has transitioned from high concentration in water heaters to a diversified portfolio of products and services including HVAC, water purification, and protection plans. The share of water heater revenue has changed from 72% in 2017 to 45% in 2025. The Company has a significant share of recurring monthly revenue, about 84% in Canada and 51% in the U.S. The Company has been growing its presence in the U.S. through tuck-in acquisitions of HVAC sale businesses and converting them into a high-margin rental business. CBRA reflects Reliance's moderate but growing geographic diversification outside of Ontario. The current assessment also considers that the water heating equipment rental sector is saturated in Ontario, and, as such, organic growth is limited by new housing construction, which can be cyclical or less predictable.

Comprehensive Financial Risk Assessment (CFRA): BBB
Reliance has a history of strong earnings and operating cash flows, moderately offset by large distributions to the holding companies and capex to support business growth. Morningstar DBRS expects that Reliance will continue to manage its debt load and distributions going forward with the aim of sustaining its key credit metrics and subsequently improving the financial risk profile. Leverage, as measured by debt-to-EBITDA, is expected to be approximately 3.5x to 3.6x range in 2025 and trend lower in the medium term. Liquidity is considered adequate to meet near-term cash commitments, the Company had $36 million cash and $200 million availability on its Senior Secured Term Loan Credit Facilities in December 2024.

Intrinsic Assessment (IA): BBBL
The IA is determined based on forward-looking assessment of the CBRA and CFRA, while also taking into consideration industry peers, among other factors.

Other Considerations: None
The credit ratings include no further adjustments from additional considerations. In the past, the Company's ratings were notched down for anticipated relocation of debt from the holding company through substantial dividends. The holding company debt will be down to approximately $150 million by 2025 from $365 million in 2023.

ENVIRONMENTAL, SOCIAL, AND 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 Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781.

Further details on the Issuer's Intrinsic Assessment can be found at https://dbrs.morningstar.com/research/453777.

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

Morningstar DBRS applied the following principal methodology:

Global Methodology for Rating Companies in Services Industries (February 3, 2025)
https://dbrs.morningstar.com/research/447184

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (February 3, 2025; https://dbrs.morningstar.com/research/447186), which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodologies have also been applied:

Morningstar DBRS Criteria: Approach to ESG Factors in Credit Ratings (August 13, 2024)
https://dbrs.morningstar.com/research/437781

Morningstar DBRS Global Corporate Criteria (February 3, 2025)
https://dbrs.morningstar.com/research/447186

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

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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 info-DBRS@morningstar.com.

The credit rating was initiated at the request of the rated entity.

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

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

This is a solicited credit rating.

For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to the Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of the website: https://dbrs.morningstar.com/understanding-ratings.

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

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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