DBRS Morningstar Confirms TMX Group Limited at A (high) and R-1 (low) with Stable Trends

DBRS Limited (DBRS Morningstar) 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). All trends are 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 Morningstar’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, which has both a leading domestic and international presence, and provides an important source of recurring revenues. Strong earnings generation remains critical for TMX as it continues to invest in the growth of its franchise and the improvement of operational efficiencies. DBRS Morningstar also views the Group as having strong risk management capabilities and governance; however, as the organization grows in size and complexity, DBRS Morningstar anticipates that operational risk will become more challenging to manage. The ratings also incorporate TMX’s trends in financial metrics, which demonstrate an ability to meet strategic targets.

RATING DRIVERS
Over the longer term, the continued successful execution of TMX’s strategy to expand its businesses, improve revenue, and enhance efficiencies (including technology), while maintaining leverage within target levels over a period of time would result in an upgrade.

Conversely, any perceived weakening of TMX’s franchise caused by a notable loss of market share or reduction in its critical scale advantages would lead to a downgrade. Any change in the Group’s debt structure resulting in structural subordination in its outstanding debt or a significant and sustained increase in leverage would also result in a downgrade.

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, in F2019 TMX sourced 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 Morningstar views barriers to entry as high, given TMX’s pre-eminent position. From a supervisory perspective, certain TMX subsidiaries have extensive oversight by various regulators at the provincial, federal, and foreign levels, providing an additional level of scrutiny at the operating subsidiary level.

After a period of expanding its GSIA segment through foreign acquisitions, as part of TMX’s diversification and expansion strategy, the Group more recently has focused on its capital formation segment through the agreement to acquire AST Investor Services Inc. (Canada) and its subsidiary AST Trust Company (Canada) in September 2020. The $165 million transaction is expected to add scale and recurring revenues to TSX Trust Company's business. The transaction is expected to close within six to 12 months and subject to receipt of regulatory approvals.

Benefitting from solid execution on the Group’s strategic initiatives, earnings continue to trend positively. There is a greater emphasis on nontransactional earnings, which contributed 52% of revenue in F2019. Meanwhile, cost-saving initiatives and system and process modernization over the last few years continue to drive growth in operating income, which rose by 8% from the previous year to $209 million in H1 2020. Furthermore, as many companies suffered during the forced shutdowns caused by the Coronavirus Disease (COVID-19) pandemic, TMX’s business lines actually benefitted, predominantly through increased trading and clearing activity. However, a prolonged economic downturn caused by the pandemic, both in Canada and globally, could negatively affect TMX’s revenues over the longer term in areas such as initial listings, secondary financing, trust services, and data subscriptions.

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 Morningstar 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 becomes more of a challenge. Furthermore, reliance on remote access for systems as companies work around the imposed coronavirus lockdowns could increase cyber risk. However, the Group continues to enhance its operational and cyber risk capabilities through dynamic 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 Morningstar generally conducts its analysis on a consolidated basis. DBRS Morningstar considers the importance of the Group’s operations, including the Canadian Depository for Securities Limited 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 Morningstar does not anticipate that the holding company, TMX, would benefit from such intervention.

DBRS Morningstar views the Group’s financial metrics as strong and improving with TMX's debt-to-EBITDA ratios well placed within DBRS Morningstar’s target range of 2.0 times (x) to 3.0x for the current rating level. 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.

ESG CONSIDERATIONS
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 methodologies are the General Corporate Methodology, including Appendix 3 – TMX Group Limited (April 24, 2020; https://www.dbrsmorningstar.com/research/359999/general-corporate-methodology), DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 2019; https://www.dbrsmorningstar.com/research/353260/dbrs-morningstar-criteria-rating-corporate-holding-companies-and-parentsubsidiary-rating-relationships), and DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 10, 2020; https://www.dbrsmorningstar.com/research/357788/dbrs-morningstar-criteria-commercial-paper-liquidity-support-for-nonbank-issuers).

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.

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.dbrsmorningstar.com.

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

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

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

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