DBRS Confirms TMX Group Limited Ratings at A (high) and R-1 (low), Stable Trends, Following Announced Acquisition of Trayport Holdings Limited

DBRS, Inc. (DBRS) confirmed the Issuer Rating and Senior Unsecured Debt rating of TMX Group Limited (TMX or the Group) at A (high) and the Group’s Commercial Paper rating at R-1 (low). The trend on all ratings is Stable. These rating confirmations follow TMX’s announced acquisition of Trayport Holdings Limited (Trayport), the primary connectivity network and data and analytics platform for European wholesale energy markets. In conjunction with the acquisition of Trayport, TMX has agreed to sell Natural Gas Exchange Inc. (NGX) and Shorcan Energy Brokers Inc. (Shorcan Energy) to Intercontinental Exchange Inc. (ICE).

In confirming the ratings, DBRS recognizes the strategic rationale for the acquisition of Trayport, which will enhance TMX’s data and analytics offering, increase its global presence and grow its recurring revenue streams. TMX estimates that approximately 40% of its revenues are recurring, and this will increase to about 50% with the Trayport acquisition. At the same time, the Group will sell NGX and Shorcan Energy, which together contribute about 8% of TMX’s revenues. While NGX is a particularly strong business as a leading Canadian-based physical energy exchange and clearing house, DBRS understands that this sale is a necessary step to complete the transaction. NGX and Shorcan Energy already had an affiliation with ICE through a technology and clearing alliance for North American natural gas and Canadian power, so this sale to ICE also makes sense from a strategic perspective. The rating confirmations also consider the expected increase in leverage to finance the transaction as well as the high execution risk associated with the various moving pieces that need to be accomplished in order to complete the transaction.

TMX has agreed to acquire Trayport for a total consideration of $931 million, consisting of $592 million in cash and the sale of NGX and Shorcan Energy, which is valued at $339 million. TMX plans to finance the acquisition through cash on hand, commercial paper issuance, a new credit facility and the sale of NGX/Shorcan Energy. While DBRS sees this financing plan as increasing leverage, TMX has demonstrated a proven ability to reduce its outstanding debt within a reasonable time frame following the 2012 Maple transaction. DBRS does note that the Group is purchasing a long-term strategic asset via generally short-term funding sources. While DBRS has some concerns regarding this approach, TMX’s commercial paper outstanding is fully covered via a backstop facility. While this provides some comfort, DBRS will closely monitor the reduction of TMX’s commercial paper outstanding as well as the reduction of the Group’s reliance on the credit facility over the medium term. If there is not sufficient progress in these reductions, there could be downward pressure on the ratings.

Strong earnings generation remains critical, as TMX anticipates that it will continue to pay down its debt with free cash flow. The transaction is expected to be immediately accretive to earnings, before any synergies. Revenue synergies can be captured through the acceleration of Trayport’s growth initiatives, new product development and expansion into new markets, among other things. Overall, DBRS sees the Group as well positioned to benefit from growing volumes given its highly scalable technology infrastructure.

DBRS sees the transaction as carrying high execution risk. In particular, the financing plan includes the planned sale of NGX/Shorcan Energy, which could be significantly delayed or terminated, especially as TMX awaits approval from the Canadian Competition Bureau, although such a scenario is unexpected. While a timing mismatch related to the purchase of Trayport and the sale of NGX/Shorcan Energy is an acceptable scenario that DBRS has factored into its current rating levels, a significant delay in the sale or a termination of the sale of NGX/Shorcan Energy could have rating implications for TMX. DBRS does not see the financing that is being used to bridge the potential timing difference as a long-term funding option for TMX. In confirming the ratings, DBRS is conveying its expectation that, if the sale of NGX/Shorcan Energy were to be significantly delayed or terminated, TMX would enact an alternate financing plan in a timely manner.

RATING DRIVERS
Over the longer term, TMX’s continued successful execution of its strategy, including expansion outside of the resource sector and increasing recurring revenues, could add positive rating pressure. For any positive rating actions, TMX would also need to demonstrate sustained leverage at a level commensurate with the higher rating range.

Given the high execution risk and increased leverage associated with this transaction, as well as the use of short-term funding to finance a long-term strategic asset, negative rating pressure could arise if the transaction is not executed as anticipated or if there is not a reduction in leverage in a timely manner post–transaction close. If there is any perceived weakening of TMX’s franchise — indicated by a notable loss of market share or a reduction in its critical scale advantages — this could negatively pressure the ratings. Any change in the Group’s debt structure resulting in structural subordination in TMX’s outstanding debt would likely lead to a re-examination of the holding company’s debt ratings.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodologies are the General Corporate Methodology, including the TMX-specific section in Appendix 4 (May 2017); DBRS Criteria: Rating Corporate Holding Companies and Their Subsidiaries (December 2016); and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (March 2017), which can be found on our website under Methodologies.

The primary sources of information used for these ratings include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

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

Lead Analyst: Lisa Kwasnowski, Senior Vice President
Rating Committee Chair: Michael Driscoll, Managing Director
Initial Rating Date: September 13, 2013
Last Rating Date: September 20, 2017

The rated entity or its related entities did participate in the rating process. DBRS did have access to the accounts and other relevant internal documents of the rated entity or its related entities.

For more information on this credit or on this industry, visit www.dbrs.com.