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

DBRS Limited (DBRS) confirmed the Senior Secured Notes rating of Reliance LP (OpCo or the Company) at BBB (low) with a Stable trend. The confirmation was 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 were steady in 2018, the first full year following the acquisition by Cheung Kong Asset Holdings Limited. OpCo’s financial risk assessment improved in 2018, with the cash flow-to-debt, debt-to-EBITDA and EBITDA-interest coverage ratios all improving from continued growth in the rental base. DBRS notes, however, that the debt-to-EBITDA ratio remains slightly weaker for the rating but is expected to strengthen to below 3.5 times (x) and be in line with the BBB rating category by the end of 2019. DBRS expects the Company to continue to manage its debt load and distributions in a prudent manner in order to maintain the three above-noted key credit metrics in the current rating category. A positive rating action may occur if both the cash flow-to-debt and debt-to-EBITDA ratios improve meaningfully above 27% and below 3.0x, respectively, for a sustained period of time. DBRS believes that a positive rating action for OpCo is unlikely in the near term given the current leverage at the Company. A negative rating action may occur if these two key credit metrics weaken to a level no longer commensurate with the current rating category, if for example, there is a significant increase in the debt load.

The ratings of OpCo additionally reflect (1) its stable rental attrition rate at 3% to 4%, (2) the size and scope of the Company’s water heater and HVAC rental operations in Ontario (approximately 1.8 million rental units in 2018) 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 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.

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

The principal methodologies are Rating Companies in the Services Industry and DBRS Criteria: Guarantees and Other Forms of Support, which can be found on dbrs.com under Methodologies & Criteria.

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.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada