Press Release

DBRS Confirms Teranet Holdings LP at BBB (high)

Infrastructure
April 11, 2013

DBRS has today confirmed the BBB (high) rating on the Senior Secured Debt of Teranet Holdings LP (the Issuer), the guaranteed financing vehicle of Teranet Inc. (Teranet or the Company). The trend on the rating remains Stable, supported in part by the Company’s monopoly position, healthy margins and low capital needs, although the steady erosion in transaction volumes and coverage metrics is becoming a source of concern for DBRS.

Despite a strong start, Teranet’s performance came in below expectations in 2012, as property registrations fell by 2.1% in 2012 while property searches and writ volumes declined by 0.7% and 2.4%, respectively, marking a second consecutive year of reductions. The deterioration was particularly noticeable in the fourth quarter, reflecting softening economic growth, subdued job creation and the July tightening of mortgage rules by the federal government. Nonetheless, tight expenditure control as well as continued growth in value-added services helped support EBITDA, which was little changed year over year. Debt was also fairly stable, reflecting low investment needs following the completion of the automation of Ontario’s parcel base in 2011. However, the full-year impact of the April 2011 senior bond offering exerted pressure on the debt service coverage ratio (DSCR), which fell to a low of 1.7 times (x) in 2012 from 1.8x the year before.

DBRS expects soft growth conditions, high household debt and the full-year impact of the mortgage rules tightening to maintain downward pressure on volumes through 2013. The Canadian Real Estate Association forecasts that home resales in Ontario will decline by 3.3% while Canada Mortgage & Housing Corp. (CMHC) projects a 20.8% drop in Ontario housing starts during the year. With statutory fees frozen until 2015, revenue will probably edge down in 2013 while expenses are projected to rise modestly, resulting in weaker EBITDA. Nonetheless, the fundamentals of the Ontario economy and steady international immigration flows should continue to provide support to business prospects over the longer term. The agreement currently being finalized with the Province of Manitoba to operate the provincial property registration system will also be accretive, although the positive impact on results will be very gradual given the relatively small size of the operations.

With capital investments expected to remain easily accommodated by internal cash flow, debt is projected to remain stable for the foreseeable future. However, weaker operating results anticipated in 2013 are likely to continue to weigh on the DSCR, pushing it down into the 1.6x territory. This is uncomfortably low for a BBB (high)-rated infrastructure credit subject to volume risk and is notably lower than the 2.0x DSCR anticipated for 2013 when the rating was originally assigned in 2010. As such, while DBRS notes the Company’s prudent management, successful project execution and drive to diversify revenue, continued erosion in the DSCR below 1.6x could have an adverse impact on the rating.

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 applicable methodology is Rating Public-Private Partnerships, which can be found on our website under Methodologies.

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