DBRS Assigns Issuer Rating of A (high) to TMX Group Limited, Publishes Report and Methodology

DBRS has today assigned a new Issuer Rating of A (high) to TMX Group Limited (TMX or the Company) with a Stable trend and has released a report that provides further details on the rating. In addition, DBRS has today updated Appendix 1 of its Base General Methodology for Corporate Companies to include a section describing TMX’s specific rating considerations. To obtain a copy of the report or the updated methodology please click on the links under Related Research at the right of the screen or contact us at info@dbrs.com.

The Issuer Rating conveys the likelihood of a company defaulting. For an investment-grade company, this rating is normally on par with the rating of its most senior debt security, in this case the Company’s bank loans. In its Q2 public disclosures the Company indicated that in the future it may access the debt markets to replace a portion of the existing bank loans. DBRS would need to assess the terms of any issuance before determining an appropriate rating for any such offering.

TMX has a strong franchise whose various businesses operate in equities, fixed income, derivatives and energy markets by providing services encompassing listings for issuers, trading, clearing, settlement and depository facilities, data delivery solutions and products and technology services. In Canada, TMX is by far the preeminent player in these markets with significant market share across a breadth of products. Risk management, reputational risk issues and governance are critical for TMX’s exchanges and clearinghouse operations. TMX has a plethora of controls, collateral agreements, margin arrangements, delivery versus payment processes, risk sharing by its members, the ability to assess members to cover losses, legal super priority positioning, etc., which DBRS views as appropriate to mitigate risks. TMX businesses do not actively take direct market risk, as they are not making markets or taking proprietary positions in the markets they shepherd. Furthermore, as a neo-regulator themselves, TMX sets a good example for governance best practices. TMX appears to be successfully managing operational risk as losses have not been notable.

TMX is a public company, with significant ownership by a group of 11 notable investors in the Canadian investment industry. Nine of the 11 investors have ratings from DBRS (or their parent companies do), three of which are AAA, four are AA and two are AA (low). DBRS believes that the importance of operations, such as The Canadian Depository for Securities Limited (CDS) and the Toronto Stock Exchange, to the Canadian financial system could potentially prompt government intervention in the event of a major capital markets disruption; however, the holding company, TMX, would not be a direct receiver of this support and therefore no government support has been applied in the rating assessment. The operating subsidiaries of TMX have no externally issued debt (other than operating/clearing lines). Consequently, DBRS has not found it necessary at this time to apply the holding company methodology that might otherwise call for an additional rating notch down compared to the strength of the operating companies. Any change in this regard would require re-examination of the structural subordination.

TMX subsidiaries have extensive oversight by various regulators, in and outside of Canada. This oversight provides additional scrutiny at the operating subsidiaries, which is positive for the ratings. Notwithstanding, TMX subsidiaries also are exposed to additional regulatory risk due to uncertainty surrounding regulatory requirements.

Following the Maple transaction, including the acquisition of CDS and Alpha Trading Systems Inc. in 2012, TMX’s debt level is high, limiting financial flexibility. DBRS expects management to improve the overall absolute level of debt, proportion of debt in the capital structure (debt-to-capitalization), EBITDA interest coverage levels and debt-to-EBITDA levels in a paced but methodical manner.

Notes:
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 the Base General Methodology for Corporate Companies, including the TMX Group Limited specific section in Appendix 1. Supporting methodologies include Rating Holding Companies and Their Subsidiaries. These can be found on our website under Methodologies.

The sources of information used for this rating include company documents. DBRS considers the quality of information available to it for the purposes of providing this rating of satisfactory quality.