DBRS Changes Trend on Teranet Holdings LP to Negative

DBRS has today changed the trend on the Senior Secured Debt rating of Teranet Holdings LP (Teranet or the Company, rated BBB (high)) to Negative from Stable. The rating action stems from the continuation of soft operating conditions and results, which maintains downward pressure on the Company’s debt service coverage ratio (DSCR) and financial flexibility.

Despite sustained management prudence and tight spending control, results are once again lagging expectations in 2013, with transaction volumes heading for a third consecutive year of contractions. For the first two quarters, the Company reported declines of 14.3% in property registrations, 5.1% in property searches and 10.4% in writs volumes relative to the same period a year ago, reflective of the weaker momentum of Ontario’s real estate market.

Since all statutory fees are frozen until 2015, the lower volumes directly translated into lower revenue (-9.4%), while expenses were well contained and up only modestly year-over-year. At the time of its April 2013 rating review, DBRS expected Teranet’s business to remain under pressure in 2013, owing to soft economic growth conditions, high household debt and the full-year impact of the tighter mortgage rules introduced in July 2012. This view was also supported by the contractions in housing starts and home resales projected by Canada Mortgage and Housing Corporation and the Canadian Real Estate Association, respectively. However, the extent of the erosion in volumes has been somewhat surprising in light of the reasonably sound economic conditions prevailing in Ontario and further delays the build-up of the DSCR originally anticipated by DBRS.

Barring a marked rebound in activity during the second half of the year, the headwinds encountered to date have the potential to reduce EBITDA by approximately 9% this year. While the absence of debt needs for the foreseeable future will provide stability to interest expenses, weaker operating results may push Teranet’s DSCR as calculated by DBRS below 1.6 times (x). This compares with 1.7x in 2012 and is markedly short of the 2.0x DSCR foreseen for 2013 at the time the rating was originally assigned. This would also be below the minimum threshold identified by DBRS in its last rating report as necessary to maintain the BBB (high).

Ontario’s real estate market is expected to remain subject to volatility and uncertainty over the months to come, as highlighted by the varying opinions of market specialists. As such, DBRS plans to continue to track the evolution of results through 2013 before making a decision on Teranet’s rating, but could act earlier if performance during the third quarter disappoints.

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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.