TEXT-S&P rates Reliance Intermediate Holdings 'BB+'

Fri Nov 16, 2012 5:17pm EST
 
Email This Article |
Share This Article
  • Facebook
  • LinkedIn
  • Twitter
| Print This Article
[-] Text [+]

Overview
     -- We are assigning our 'BB+' long-term corporate credit rating, and 
stable outlook, to Reliance Intermediate Holdings LP and subsidiary Reliance 
LP (collectively, Reliance), taking into account the entities' consolidated 
credit profile.
     -- We are also raising our issue-level rating on Reliance LP's senior 
secured notes to 'BBB' from 'BBB-', and assigning our '1' recovery rating to 
the debt.
     -- In addition, we are raising our issue-level rating on Reliance 
Intermediate Holdings LP's senior secured notes to 'BB' from 'BB-', and 
revising our  recovery rating on the debt to '5' from '4'.
     -- The stable outlook is predicated on a steady consolidated financial 
risk profile, with debt to EBITDA of about 4.5x and funds from operations to 
debt of about 15%, as Reliance adds debt slowly to support growth, while 
distributing substantially all free cash flow to its sole shareholder.

Rating Action
On Nov. 16, 2012, Standard & Poor's Ratings Services assigned its 'BB+' 
long-term corporate credit rating to Reliance Intermediate Holdings LP and 
subsidiary Reliance LP, taking into account the entities' consolidated credit 
profile. The outlook is stable.

At the same time, Standard & Poor's raised its issue-level rating on Reliance 
LP's senior secured notes to 'BBB' (two notches above the corporate credit 
rating) from 'BBB-', and assigned its '1' recovery rating to the debt, 
indicating an expectation of very high (90%-100%) recovery in the event of a 
default. 

In addition, we raised our issue-level rating on Reliance Intermediate 
Holdings LP's senior secured notes to 'BB' (one notch below the corporate 
credit rating) from 'BB-', and revised our recovery rating on the debt to '5' 
from '4'. A '5' recovery rating indicates our expectation of modest (10%-30%) 
recovery if a default occurs.

Rationale
The ratings on Reliance Intermediate Holdings LP and Reliance LP reflect what 
Standard & Poor's views as the company's strong business risk profile, 
characterized by the solid market position and stable cash flows from its 
water heater rental business, which contributes about three-quarters of the 
company's 2011 EBITDA. The ratings also reflect the company's aggressive 
financial risk profile, evidenced by high debt leverage and large 
distributions to equityholders.

We assess Reliance Intermediate Holdings LP's credit profile on a consolidated 
basis with its subsidiary, Reliance LP. Reliance Intermediate Holdings LP is a 
pure holding company whose only asset is its equity interest in Reliance LP. 
The consolidated entity (Reliance) has a large debt load from the June 2007 
acquisition of the assets by Alinda Infrastructure Fund I LP, managed by 
Alinda Capital Partners Ltd., a private investment firm specializing in 
infrastructure assets. Neither Reliance Intermediate Holdings LP nor Reliance 
LP releases financial statements publicly.

The company's core water heater rental business enjoys favorable demand 
characteristics supported by the essential nature of water heaters for homes 
in Ontario, customers' preference for renting rather than owning water 
heaters, and good affordability due to low rental payments. In our view, these 
favorable factors are offset by the portfolio's modest attrition owing to 
aggressive competition from smaller players and weaker housing conditions. We 
believe that Reliance's faster-growing security and monitoring business 
increases the company's risk profile somewhat, considering its less attractive 
market position and lower margins.

We believe that Reliance enjoys a strong market position in all its business 
segments. The company's position in the water heater rental segment is 
particularly strong and sustainable as high capital intensity, a strong track 
record, and long-standing relationships with both water heater manufacturers 
and homebuilders establish high barriers to entry. In our opinion, this has 
given incumbents the ability to increase rental rates, which are not 
regulated, to cover inflation and increases in operating costs, while smaller 
competitors increase the portfolio's attrition rate. The water heater rental 
segment also enjoys a high EBITDA margin of more than 50% because of low 
maintenance intensity, low technology risk, and the long operating life of 
water heater assets. These favorable factors combine to ensure stable and 
predictable cash flows in this core business segment, which in turn support 
what we consider the company's strong business risk profile.

Standard & Poor's believes that Reliance's security and monitoring business 
faces more intense competition and higher operating costs. Despite being the 
second-largest player in Canada, the company operates in a more fragmented 
industry with smaller and regional players capturing about half of the market. 
Reliance's customer attrition rate compares favorably with the industry, but 
it is still higher than that of Reliance's water heater segment and moderately 
offsets the strength of the water heater rental business.

Slower housing starts in Ontario will continue to be a drag on organic unit 
growth in both water heater rentals and monitoring, exposing the company 
further to attrition stemming from the aggressive tactics of small 
competitors. That said, we believe that the company has mitigated the higher 
operating costs associated with attrition and portfolio defense with its 
ability to increase rental rates, and to increase its rental business in the 
heating, ventilation, and air conditioning segment.

We believe that Reliance's strong business risk profile supports its 
aggressive financial risk profile, which is characterized by credit measures 
that are consistent with the 'B' rating category. We estimate the company's 
consolidated last 12 months adjusted total debt to EBITDA at about 4.7x and 
adjusted funds from operations (FFO) to total debt of about 15%, both of which 
are consistent with 'B' category financial risk parameters. Nevertheless, we 
expect that such credit measures should enable the company to deploy its 
operating cash flow to finance its maintenance capital expenditure and to 
distribute to shareholders. Considering the robust cash flow and good earnings 
visibility, we believe that the issuer has unusually good control over its 
financial ratios, demonstrated by its steady increase in debt to fund capital 
expenditures while making large shareholder distributions and improving 
leverage modestly in recent years. Reliance has increased debt by C$140 
million since mid-2010 to fund growth capital expenditures and acquisitions, 
while paying out C$170 million in dividends--substantially all of its free 
operating cash flow for the corresponding period, as expected.

Liquidity
We view Reliance's liquidity as adequate. Liquidity is normally only a 
secondary credit factor for Reliance, considering its high margins and 
predictable capital expenditures. Our view of the company's liquidity profile 
incorporates the following expectations:
     -- Liquidity sources (including cash, discretionary cash flow, and 
availability under its revolving credit facility) will exceed uses by more 
than 1.2x through 2013;
     -- Liquidity sources will continue to exceed uses, even if EBITDA were to 
decline by 30% in 2012 and 2013;
     -- Scheduled debt maturities are manageable and we expect them to be 
refinanced in the near term; and
     -- The company has good relationships with its banks and good standing in 
credit markets.

Recovery analysis
For the complete recovery analysis on Reliance see the recovery report to be 
published on RatingsDirect on the Global Credit Portal following this research 
update.

Outlook
Our stable outlook is predicated on our view of a steady consolidated 
financial risk profile, with debt to EBITDA of about 4.5x and FFO to debt of 
about 15%, as Reliance adds debt slowly to support growth, while distributing 
substantially all free cash flow to its sole shareholder.

We expect that pressure on the Reliance ratings would emerge if consolidated 
leverage approached 5x or FFO to debt dropped to about 12%, which could occur 
if costs for customer acquisition or retention rise amid higher debt for 
organic growth and acquisitions. In such a scenario, distributions would 
likely be a key factor in defining credit quality.

We believe that the prospects for a higher rating are limited with the current 
financial risk profile, given that leverage is likely to remain steady as debt 
rises along with higher earnings. In addition, we believe the current 
financing structure that compels distributions from the operating company to 
service the holding company's US$350 million notes is critical to support 
Alinda Infrastructure Fund I LP's ownership of Reliance.

Related Criteria And Research
     -- Criteria Guidelines For Recovery Ratings On Global Industrials 
Issuers' Speculative-Grade Debt, Aug. 10, 2009
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
     -- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008

Ratings List
Rating Assigned
Reliance LP
Reliance Intermediate Holdings LP
Corporate credit rating    BB+/Stable/--

Ratings Raised/Recovery Rating Assigned
Reliance LP
                           To          From
Senior secured notes       BBB         BBB-
 Recovery rating           1           

Ratings Raised/Recovery Rating Revised
Reliance Intermediate Holdings LP
                           To         From
Senior secured notes       BB         BB-
 Recovery rating           5           4


Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.