DBRS Morningstar Assigns Rating of BBB with a Stable Trend to Teranet Holdings LP’s Debt Issue

DBRS Limited (DBRS Morningstar) assigned a rating of BBB with a Stable trend to the $550 million 3.544% Series 2020-1 Senior Secured Bonds (the Senior Bonds) issue of Teranet Holdings LP (the Company; rated BBB with a Stable trend by DBRS Morningstar). The Senior Bonds have been issued from the May 21, 2020, Offering Memorandum and will mature on June 11, 2025. DBRS Morningstar notes that the Company will also issue and settle $300 million 3.940% Series 2020-2 Senior Secured Bonds in the U.S. market in December 2020. The total amount raised is $850 million. The rating being assigned is based upon the rating on already-outstanding series of the above-mentioned debt instrument.

The intended use of the proceeds from the Senior Bonds issue will be to refinance the $700 million Series 2010-2 Senior Secured Bonds, which mature on December 16, 2020, with the excess amount of $150 million to be used for general corporate purposes. The Company will early-redeem $400 million of the $700 million Series 2010-2 Senior Secured Bonds, with the remaining $300 million to be redeemed at maturity upon funding of the 3.940% Series 2020-2 Senior Secured Bonds issuance in December 2020. The financing is consistent with DBRS Morningstar’s expectations incorporated in the September 18, 2019, confirmation of the Company’s ratings. The Senior Bonds rank pari passu with all other senior secured and unsubordinated obligations of the Company. As a result, the rating is consistent with the ratings previously assigned by DBRS Morningstar to the Company’s similarly ranked senior secured bonds outstanding.

The positive trend in Ontario registration volumes continued in the Q1 2020 results. In Q1 2020, registration volumes increased 11.5% versus 2019 and search and writ volumes increased 10.5% and 12.0%, respectively, versus 2019. The real estate market in Ontario rebounded as the market adjusted to the policy measures introduced in previous years and interest rates remained at historically low levels. Q1 2020 operating cash flow increased by 4.2% versus 2019, driven by the 11.5% increase in Ontario registration volumes. The debt service coverage ratio (DSCR) as at March 31, 2020, was 1.90 times (x; 1.99x with Manitoba), an increase of 0.11x from the March 31, 2019, ratio of 1.79x. While March home sales were higher overall by 12.3% year over year, the last half of March materially dragged down the upward trend in the first half. There was a 49% increase in the first half of the month when compared with the same period in March 2019, while the last half of March was down by 15.9% versus March 2019 due to the commencement of restrictions related to the Coronavirus Disease (COVID-19). The published April and May 2020 numbers indicated a full-month-to-prior-year-month decline of home sales in the Greater Toronto Area of 67% and 53%, respectively.

Management’s forecast base case for 2020 assumes a roughly 50% decline in home sales activity in April, May, and June, with a gradual ramp-up by September 2020. Due to the 60- to 90-day lag between sales and the close of a home, management anticipates that this decline in homes sales will affect registration volumes materially in June, July, and August. Management’s base case assumes less of an impact to the other sources of revenue, including refinancing, second mortgages, and life-events activity. This results in the expected DSCR dropping to between 1.55x and 1.65x (between 1.60x and 1.70x with Manitoba). The Company has made no change to its 2021 forecast and beyond, as the coronavirus is viewed as a temporary disruption to the market and the medium- and longer-term fundamentals of the Ontario real estate market remain intact (strong immigration/population growth, low interest rates, housing density, and continued economic growth). The DBRS Morningstar-forecast base case for 2020 assumes a sharper decline where home sales activity from June to August falls by roughly 70%, with a gradual ramp-up to December 2020, before returning to forecast 2021 volume activity expectations. This results in a more conservative DSCR forecast as at December 31, 2020, of 1.16x (1.22x with Manitoba) based on DBRS Morningstar’s calculations.

DBRS Morningstar noted in its most recent rating report for the Company that a negative rating action could result from an economic downturn or a protracted material softening of the real estate market, leading to markedly weaker financial metrics, with the DSCR declining to a forecast average of roughly 1.45x. While the negative impact of the coronavirus on current housing market conditions may cause the DSCR to fall below 1.45x in 2020, DBRS Morningstar expects the Company’s performance to be temporary with a return to financial metrics in the rating category in 2021. Should the downturn in affected real estate market regions extend for a protracted period beyond current expectations, a negative rating action could result.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

The principal methodology is Rating Public-Private Partnerships (August 23, 2019), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577