DBRS Confirms Reliance LP at BBB (low) with a Stable Trend

DBRS Limited (DBRS) has today confirmed the Senior Secured Notes rating of Reliance LP (OpCo or the Company) at BBB (low) with a Stable trend. The 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. The Stable trend reflects the attrition rate of the Company, which has now stabilized at a more moderate level.

In March 2017, OpCo announced that Cheung Kong Property Holdings Limited had entered into a definitive agreement to acquire the Company and its parent, Reliance Intermediate Holdings LP (rated BB with a Stable trend by DBRS), 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 did not expect any material changes to the operations of the Company as a result of the Transaction (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 does expect the distributions policy for 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 believes that if successful, this policy could help relieve pressure on the Company’s key credit metrics. While the Company’s cash flow-to-debt ratio has recovered to the BBB range, its debt-to-EBITDA ratio remains elevated for 2016. DBRS expects the Company to continue to manage its debt load and distributions going forward and to grow its earnings and cash flows in order to maintain or improve this key ratio.

The ratings of OpCo additionally reflect (1) its stable rental attrition rate, (2) the size and scope of the Company’s water heater rental operations in Ontario (1.7 million rental units in 2016) and (3) high barriers for new players to build a meaningful market share. The rentals 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 believes that decreasing the rental attrition rate to historical levels remains a challenge. If the rental attrition rate rises above 5% over the medium term, this higher-than-anticipated churn rate could result in negative rating implications.

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 OpCo’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 OpCo, 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.