DBRS Confirms Reliance Intermediate Holdings LP at BB with Stable Trends

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior 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), 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.

In March 2017, HoldCo announced that Cheung Kong Property Holdings Limited had entered into a definitive agreement to acquire the Company for $2.82 billion from Alinda Capital Partners (the Transaction). The Transaction is expected to close by the end of the first half of 2017. DBRS noted that it viewed the Company on a stand-alone basis from its owner, as (1) the Company does not require any equity injections from its owner and (2) distributions to the owner are discretionary and could be curtailed if necessary (see press release titled “DBRS Comments on the Acquisition of Reliance by Cheung Kong Property Holdings Limited” dated March 31, 2017). Following the closing of the Transaction, DBRS expects the distribution policy for HoldCo and OpCo to be more flexible, resulting in a more sustainable level of distributions to the new parent. Cash flow from operations generated by the Company is expected to be sufficient to fund distribution and capital expenditure requirements, reducing the need for additional external debt financing. DBRS notes that the current ratings of the Company assume that there will be no material change in the outstanding debt balance in the medium term, as HoldCo does not have any credit facilities, and the debt matures in 2023. Any material incremental debt at the HoldCo level could have negative credit implications, as non-consolidated leverage is high (61.6% at December 31, 2016). DBRS’s methodology guidelines provide for more than a one-notch differential if the holding company’s debt leverage is above 30%.

DBRS 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 1.5 times (x; 3.9x for 2016). 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 does not anticipate these restrictions being triggered in the foreseeable future, as the current credit metric significantly exceeds the covenant, and there have been no disruptions in cash flow to HoldCo.

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

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 to the right under Related Research or by contacting us at info@dbrs.com.

The principal methodology is Rating Companies in the Consumer Products Industry (September 2016), which can be found on dbrs.com under Methodologies. However, DBRS views the Company’s strong franchise as having a superior business risk profile than that of a traditional consumer products company. As a result, the Company is able to manage higher leverage metrics.

Overall, in DBRS’s assessment of the credit quality of the Company, DBRS factors in the following key items: (1) competition arising from regulatory changes, (2) effects of attrition on customer base, (3) stability of cash flow generated from customer base, (4) flexibility to increase rental rates, (5) limited operational risk through a co-ownership agreement and (6) dependency on new home developments for growth.