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

DBRS Limited (DBRS) confirmed the Issuer Rating and the 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. 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 Group 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.

KEY RATING CONSIDERATIONS
TMX’s ratings are driven by the Group’s strong franchise with leading domestic market positions across a diversified set of businesses, including exchanges and clearing houses. The ratings also consider the Group’s plan to grow its data and analytics business, enhanced by the Trayport acquisition in Q4 2017, which provides an important source of recurring revenues. DBRS also views the Group as having strong risk management capabilities and governance; however, as the organization grows in size and complexity, managing risk across the Group could become more challenging. DBRS sees operational risk as the critical risk for TMX to manage, and continued investment in technology, infrastructure, and information security are of the utmost importance. The ratings also incorporate TMX’s improving financial metrics due to a higher level of earnings and reduced debt. Importantly, the Group has made progress with reducing its leverage to levels that fall within the appropriate rating range. Strong earnings generation remains critical for TMX as it continues to invest in growth and anticipates further paying down its debt with free cash flow.

RATING DRIVERS
The continued successful execution of TMX’s strategy to streamline segments and expand its data and analytics businesses could add positive ratings pressure over the longer term. In addition, sustained improvement in efficiency while maintaining leverage within target levels over a period of time would also be positive for the ratings.

Conversely, any perceived weakening of TMX’s franchise, as indicated by a notable loss of market share or reduction in its critical scale advantages, could negatively pressure the rating. At the same time, 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. 

RATING RATIONALE
TMX is the leading provider of listings, trading, clearing, settlement and depository services in Canada. TMX is the preeminent player in many of the businesses where it competes, with significant market shares across a breadth of products within equities, fixed income and derivatives in Canada. Furthermore, TMX sources 32% of its revenues from outside Canada. TMX can leverage this to deliver high quality execution, facilitate capital raising and provide data services and analytics, amongst other things. The Group faces competition from exchanges and other service providers looking to enter the Canadian market; however, DBRS views barriers to entry as high. From a supervisory perspective, TMX subsidiaries have extensive oversight by various regulators, including federal, provincial and foreign regulators, providing an additional level of scrutiny at the operating subsidiary level.

As part of its diversification and expansion strategy, TMX is developing its complementary information, product and technology offerings, which are now grouped under its Global Solutions, Insights, and Analytics (GSIA) segment. TMX’s ability to continue to advance and innovate its technology offerings is critical to the Group’s continued growth and to maintaining its competitive advantages. In December 2017, the Group completed its acquisition of London-based Trayport Holdings Limited (Trayport), a provider of technology solutions for energy traders, brokers and exchanges, to bolster its data analytics business while growing recurring fee-based revenues. In order to help finance the $952 million acquisition, TMX sold Natural Gas Exchange Inc. and Shorcan Energy Brokers.

Earnings continue to demonstrate positive trends with the implementation of and execution on its strategic initiatives. Indeed, with the acquisition of Trayport, TMX has seen an expansion in its non-transactional revenue base and management expects the GSIA segment to become a larger contributor to earnings. Meanwhile, the cost-saving initiatives undertaken over the last few years are bearing fruit, with positive operating leverage contributing to net income in the first half of 2018 of $159 million and a return on average common equity of 9.8%.

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. As the Group grows across business lines, operational risks become more pronounced; however, TMX appears to be successfully managing operational risk, as operational losses have not been notable.

From a structural perspective, TMX has a strong and stable shareholder base, with significant ownership by prominent participants in the Canadian investment industry. With no externally issued debt by its operating subsidiaries (excluding operating/clearing lines), DBRS’s analysis is generally done on a consolidated basis. DBRS considers that the importance of the Company’s operations, such as the Canadian Depository for Securities Limited 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.

DBRS views the Group’s financial metrics as satisfactory and improving. Debt levels have been reduced and leverage is now within TMX’s target range of 2 times (x) to 3x (debt/EBITDA), despite falling out of range briefly while closing the Trayport transaction. Leverage metrics are also within DBRS’s range for the current rating level. Importantly, operational cash flows are sufficient to cover interest costs, and this coverage is improving as the Group continues to work towards simplifying and integrating its various systems and infrastructure to lower its cost base. Cash flows remain critical to TMX’s growth strategy.

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 on the issuer page at www.dbrs.com.

The applicable methodologies are the General Corporate Methodology, including the TMX-specific section in the Appendix (May 2018); DBRS Criteria: Rating Holding Companies and Their Subsidiaries (December 2017); and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (April 2018), which can be found on our website under Methodologies.

Lead Analyst: Maria-Gabriella Khoury, Vice President, Global FIG
Rating Committee Chair: Michael Driscoll, Managing Director, Head of NA FIG

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com