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

DBRS Limited (DBRS) confirmed the Issuer Rating and the Senior Unsecured Debt rating of TMX Group Limited (TMX or the Group) at A (high) as well as its Commercial Paper (CP) rating at R-1 (low). The trend on all ratings is Stable. The Senior Unsecured Debt ranks pari passu with bank debt (none of which is outstanding) and, consequently, is set equal to the Issuer Rating. The Group has appropriate liquidity backstops provided by well-rated banks to support its CP 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 its 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 success in growing its data and analytics business, enhanced by the 2017 Trayport Holdings Limited (Trayport) acquisition, which provides an important source of recurring revenues. Strong earnings generation remains critical for TMX as it continues to invest in the franchise. DBRS also views the Group as having strong risk management capabilities and governance; however, as the organization grows in size and complexity, DBRS sees operational risk as critical for TMX to manage. The ratings also incorporate TMX’s improving financial metrics based on higher earnings and reduced debt. Importantly, the Group has made progress on reducing its leverage to levels that fall within the appropriate rating range.

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 profitability 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 caused by a notable loss of market share or reduction in its critical scale advantages could negatively pressure the ratings. At the same time, any change in the Group’s debt structure resulting in structural subordination in its outstanding debt or a significant increase in leverage could also negatively affect the ratings.

RATING RATIONALE
TMX is the leading provider of listings, trading, clearing, settlement and depository services in Canada where the Group enjoys significant market shares across a breadth of products within equities, fixed income and derivatives. Furthermore, TMX sources 33% of its revenues from outside Canada, predominantly through its Global Solutions, Insights and Analytics (GSIA) segment. The Group faces competition from exchanges and other service providers seeking to enter the Canadian market; however, DBRS views barriers to entry as high, given TMX’s preeminent position. From a supervisory perspective, TMX subsidiaries have extensive oversight by various regulators at the federal, provincial and foreign levels, providing an additional level of scrutiny at the operating subsidiary level.

As part of its diversification and expansion strategy, TMX has been developing its complementary information, product and technology offerings through its GSIA segment. TMX’s ability to continue to advance and innovate its technology offerings is critical to its growth strategy and to maintaining its competitive advantages. The Group’s 2017 acquisition of London-based Trayport, a technology solutions provider for energy trading, has been accretive to TMX’s earnings, providing a good source of recurring fee-based revenues. Furthermore, in Q2 2019, Trayport acquired Vienna-based VisoTech, a provider of European short-term energy trading solutions, thus enhancing the Group’s overall product offering and geographic footprint.

Benefiting from solid execution on the Group’s strategic initiatives, earnings continue to trend positively. Indeed, with the acquisition of Trayport, TMX has seen an expansion in its non-transactional revenue base with the GSIA segment contributing around 37% of H1 2019 earnings versus only 28% in H1 2017. Meanwhile, cost-saving initiatives over the last few years, coupled with an agile approach to allocating resources, have contributed to growth in operating income, which rose by 5% from the previous year to $194 million in H1 2019.

Risk management, reputational risk issues and governance are critical for TMX’s exchanges and clearinghouse 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 as well as legal super-priority positioning, which DBRS views as appropriate. The Group’s businesses do not actively take direct market risk as they are not making markets or taking proprietary positions in the markets they facilitate. As TMX grows across business lines and geographies, operational risks can become larger challenges. The Group continues to enhance its operational risk capabilities through continued refinement of its enterprise risk management approach.

From a structural perspective, TMX has a strong and stable shareholder base with 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 the importance of the Group’s operations, including the Canadian Depository for Securities Limited Ltd. and the Toronto Stock Exchange, to the Canadian financial system, which could potentially prompt government intervention in the event of a major capital markets disruption. Nevertheless, 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. TMX's debt-to-EBITDA ratios are improving and within DBRS’s target range of 2.0 times (x) to 3.0x for the current rating level. Importantly, operational cash flows, which remain critical to TMX’s growth strategy, are sufficient to cover interest costs and this coverage is improving as the Group benefits from enhanced recurring revenues and an efficient cost base.

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

The applicable methodologies are General Corporate Methodology, including Appendix 4 – TMX Group Limited (May 2019); DBRS Criteria: Rating Corporate Holding Companies and Their Subsidiaries (December 2018); and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (March 2019), which can be found on our website under Methodologies & Criteria.

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 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.

DBRS will publish a full report shortly that will provide addi¬tional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

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

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