Morningstar DBRS Finalizes Provisional Credit Rating of BB With Stable Trend on Heavy Metal Equipment & Rentals' Long-Term Senior Debt

DBRS Limited (Morningstar DBRS) finalized its provisional credit rating of BB with a Stable trend on Heavy Metal Equipment & Rentals' (2122256 Alberta Ltd.; HME or the Company) Long-Term Senior Debt. This is one notch below the Long-Term Issuer Rating, reflecting HME's substantial balance sheet encumbrance.

On February 26, 2025, HME issued $300 million of 7.25% senior unsecured notes (the Notes) that mature on February 26, 2030. The Company intends to use the net proceeds to repay a portion of outstanding indebtedness and for general corporate purposes. The Notes will be effectively subordinated to all secured indebtedness, including the asset-based revolving credit facility, to the extent of the value of the assets securing such indebtedness.

CREDIT RATING DRIVERS
Over the longer term, Morningstar DBRS would upgrade HME's credit ratings if the Company were able to lessen its dependence on oil sands-related revenues while maintaining similar risk-adjusted returns. The Long-Term Senior Debt credit rating would be equalized with the Long-Term Issuer Rating if asset encumbrance levels were reduced.

Morningstar DBRS would downgrade the Company's credit ratings if its earnings deteriorated significantly or if cash flow leverage increased materially. Over the longer term, the credit ratings would be downgraded should the North American economy materially transition away from the use of fossil fuels at a pace faster than expected, affecting demand for the Company's equipment.

Franchise Building Block (BB) Assessment: Moderate

Earnings Building Block (BB) Assessment: Good/Moderate

Risk Building Block (BB) Assessment: Moderate

Funding and Liquidity Building Block (BB) Assessment: Weak

Capitalization Building Block (BB) Assessment: Moderate/Weak

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

Environmental (E) Factors
The following Environmental factor had a relevant effect on the credit analysis: Morningstar DBRS views the Climate and Weather Risks factor as relevant to the credit ratings, but it does not affect the assigned credit ratings or trends. Over the longer term, the Company's customers, particularly those operating in the oil sands, may be exposed to climate transition risks and HME may, in turn, be affected by any resulting reductions in oil production.

Governance (G) Factors
The following Governance factor had a relevant effect on the credit analysis: Morningstar DBRS views the Corporate/Transaction Governance factor as relevant to the credit ratings, but it does not affect the assigned credit ratings or trends. The Company is governed by a board of directors consisting of only two members: the president and chief executive officer, and the vice president of operations. The lack of independent directors, as well as the absence of formal audit or risk committees, indicates a weaker corporate governance structure and is considered within the Franchise Strength and Risk Profile grid grades.

There were no Social factors that had a relevant or significant 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.

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

The principal methodology is the Global Methodology for Rating Non-Bank Financial Institutions (November 19, 2024) https://dbrs.morningstar.com/research/443208. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781 in its consideration of ESG factors.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found on the issuer page at 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.

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.

For more information on this credit or on this industry, visit dbrs.morningstar.com.

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