DBRS Morningstar Confirms Enercare Solutions Inc. at BBB (low) with Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Notes rating of Enercare Solutions Inc. (ESI or the Company) at BBB (low). All trends are Stable. The confirmations reflect ESI’s stable business risk assessment, supported by its portfolio of 1.2 million water heater and HVAC rental units that provide a contracted and recurring stream of earnings and cash flows. This is offset by the Company’s key credit metrics, specifically the cash flow-to-external debt and external debt-to-EBTIDA ratios, which are weak for the current ratings.

In October 2018, Enercare Inc., ESI’s parent, was acquired by Brookfield Infrastructure Partners L.P. and its institutional partners (collectively, Brookfield; the Acquisition). As part of the Acquisition, Enercare Finance Inc. (EFI), a subsidiary of Enercare Inc., entered into a $700 million term loan that is guaranteed by the Company and the parent; part of the proceeds was used to repay around $420 million of debt at ESI. DBRS Morningstar noted that on a pro-forma basis after the Acquisition, the Company’s cash flow-to-external debt and external debt-to-EBTIDA ratios would weaken to around 16% and be above 4.0 times (x), respectively; as a result, DBRS Morningstar downgraded ESI’s ratings to BBB (low) from BBB. For the remainder of 2018 following the Acquisition, the Company’s earnings were significantly lower than expected because of the rollout of the rental model through Service Experts. Although growth in the rental base will help improve earnings and cash flows stability for ESI through higher contracted and recurring revenues, this reduces the cash amount received upfront compared with the cash amount that would have been received had the unit been sold directly to the customer (DBRS Morningstar estimates EBITDA and cash impact of $22.5 million for 2018). As such, for this transition period until recurring earnings from new rental units compensate for the loss in margin, earnings and cash flows are expected to be pressured. DBRS Morningstar estimates that annual recurring rental revenues from Service Experts will not fully offset the loss in margin until 2021.

In October 2019, Brookfield provided an equity injection to EFI, the proceeds of which were used to repay $450 million of the outstanding $700 million term loan. This reduction in debt led to an immediate improvement of the Company’s key credit metrics, although they remain weak for the current ratings. DBRS Morningstar views the equity injection as a sign of support from Brookfield and considers the commitment of Brookfield to ESI as positive for the Company. DBRS Morningstar estimates that for full-year 2019, with increasing contributions from the new Service Experts rental units, cash flow-to-external debt and external debt-to-EBITDA will strengthen moderately to around 15% and 4.30x, respectively. However, because of the lag between contracted sales and cash flow, the key credit metrics are not expected to strengthen meaningfully (cash flow-to-external debt around 20% and external debt-to-EBITDA below 4.0x) until 2021, following the transition period. Should ESI’s cash flow-to-external debt and external debt-to-EBITDA ratios remain weak at around 13% and 4.5x for a sustained period, a negative rating action will likely occur. Furthermore, if the attrition rate rises above 5% over the medium term, this higher-than-anticipated attrition rate could also 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 (February 2019) and DBRS Criteria: Guarantees and Other Forms of Support (January 2019), 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 Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

DBRS Morningstar will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

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