DBRS Confirms TMX Group Limited Ratings at A (high) and R-1 (low), Stable Trend

DBRS Limited (DBRS) has today confirmed the Issuer Rating and the Senior Unsecured Debt rating of TMX Group Limited (TMX or the Company) at A (high), and the Company’s Commercial Paper rating at R-1 (low). The trends remain Stable. The terms of the Senior Unsecured Debt rank it pari passu with bank debt (of which none is outstanding), and consequently, it has been set equal to the Issuer Rating. The Company has appropriate liquidity backstops provided by well-rated banks to support its Commercial Paper program, which in turn supports the application of DBRS’s standard short-term to long-term rating mapping.

This action follows a review of the Company’s performance and prospects. The rating reflects the strength of the Company’s franchise, including its strong market positions across a diversified set of business segments. TMX is the leading provider in Canada in equities, fixed income, derivatives and energy markets of services encompassing listings for issuers, trading, clearing, settlement and depository facilities, information services and products and technology services. The rating also takes into account the Company’s earnings trajectory, which continues to support TMX’s ability to pay down its debt. DBRS views positively the Company’s focus on paying down its debt, which was elevated following the Maple transaction in 2012 that established the Company’s current franchise. An important contributor to the rating is the Company’s solid risk management, which addresses operational, reputational and governance risks. The Company’s risk profile also benefits from the oversight of various regulators, although this regulation adds regulatory uncertainty.

While TMX is the preeminent player in Canada for many of its business activities, the Company nevertheless faces competition from exchanges and other service providers from foreign jurisdictions and must address reputational risks facing the industry related to pricing fairness and equal access to services. The Company, under its new CEO, has set an organizational direction centred around serving clients as a technology-driven solutions provider, rather than concentrating on transactions and platforms. Initiatives going forward are expected to support one or more of five strategic pillars: Capital Formation, Derivatives, Market Insights, Market Solutions and Efficient Markets. DBRS views this strategy as credible, although it inherently brings with it execution risks and the potential to affect customer service as management concentrates on implementation. So far, initiatives have included the sale of Equicom, an investor relations provider, which TMX deemed to be non-core, and the launch of AgriClear, a new online platform leveraging TMX expertise in supporting the buying and selling of cattle.

Risk management, reputational risk issues and governance are critical for TMX’s exchanges and clearing-house operations. TMX uses various means to mitigate risk in its activities, including extensive controls, collateral agreements, margin arrangements, delivery versus payment processes, risk sharing by its members, the ability to assess members to cover losses and legal super priority positioning, which DBRS views as appropriate. TMX businesses do not actively take direct market risk, as they are not making markets or taking proprietary positions in the markets they facilitate.

Furthermore, as a neo-regulator itself, TMX is obliged to set a good example for governance best practices. TMX appears to be successfully managing operational risk, as operational losses have not been notable.

TMX is a public company with significant ownership by prominent participants in the Canadian investment industry. DBRS considers that the importance of the Company’s 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, DBRS does not anticipate that the holding company, TMX, would benefit from such intervention.

The operating subsidiaries of TMX have no externally issued debt other than operating/clearing lines. This absence of structural subordination in TMX’s debt structure together with the combined strength and diversification of the group of subsidiaries results in no notching down of the rating of TMX as the parent holding company under DBRS’s holding company methodology. Any change that creates structural subordination of TMX’s debt would likely lead to a re-examination of the holding company’s debt ratings.

Following the Maple transaction, which included the acquisition of CDS and Alpha Trading Systems Inc. in 2012, TMX’s debt level became elevated and remains relatively high, limiting TMX’s financial flexibility. Although progress has been made in reducing the level of debt, DBRS expects management to continue to improve the level of debt, the proportion of debt in the capital structure (debt-to-capitalization), EBITDA interest coverage levels and debt-to-EBITDA levels in a paced yet methodical manner.

The Stable trend reflects the Company’s fundamental strengths and the progress that the Company is achieving with its franchise and financial profile. Several factors could have positive rating implications, including a sustained reduction in debt leverage and a sustained increase in transaction volumes across TMX’s various platforms and the resulting increase in income and interest coverage. Factors with negative rating implications include a systemic erosion of TMX’s market share and consequently its critical scale advantages, any operational shortcomings that threaten franchise value, a major debt-financed acquisition or any dramatic missteps with its new strategic initiatives.

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 primary rating for TMX is assessed using DBRS’s General Corporate Methodology, including the TMX-specific section in the Appendix. The DBRS Criteria, Rating Holding Companies and Their Subsidiaries, and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers are also utilized.

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

DBRS 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.