DBRS Morningstar Changes Trend on TMX Group Limited to Positive from Stable, Confirms Ratings

DBRS Limited (DBRS Morningstar) changed the trend on all ratings of TMX Group Limited (TMX or the Group) to Positive from Stable and confirmed all ratings, including the Issuer Rating and the Senior Unsecured Debt rating at A (high) and its Commercial Paper (CP) rating at R-1 (low). The Senior Unsecured Debt ranks pari passu with bank debt (none of which is outstanding) and, consequently, is equivalent 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
The Positive trend on the ratings recognizes TMX’s successful execution of its strategy to expand and diversify its businesses, which is driving consistent revenue growth and enhanced efficiencies, while maintaining financial metrics at strong levels. Furthermore, the Group’s investment in technology and infrastructure has limited operational risk issues and provided a good framework for future growth.

The ratings confirmation reflects TMX’s strong franchise with leading domestic market positions across a diversified set of businesses with significant barriers to entry. 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. DBRS Morningstar also views the Group as having strong risk management capabilities and governance, supporting the Group’s growth in size and complexity. The ratings also incorporate the positive trends in TMX’s financial metrics, which demonstrate an ability to meet strategic targets.

RATING DRIVERS
Continued franchise and earnings momentum while appropriately managing operational risk and financial metrics would lead to an upgrade of the ratings.

Conversely, deteriorating trends in financial metrics in line with a lower rating category could drive a ratings 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. Contributing to geographic diversification, TMX sourced 33% of its revenues in F2020 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 preeminent position. From a supervisory perspective, certain TMX subsidiaries have extensive oversight by various regulators at the provincial, federal, and international levels, providing an additional level of scrutiny at the operating subsidiary level.

Benefitting from solid execution on the Group’s strategic initiatives, earnings continue to trend positively. There is a greater emphasis on non-transactional revenues, which contributed 51% of revenue in F2020. Meanwhile, cost-saving initiatives and system and process modernization over the last few years continue to drive growth in operating income, which rose by 27% from the previous year to $265.6 million in H1 2021. Furthermore, as many companies suffered during the forced shutdowns caused by the Coronavirus Disease (COVID-19) pandemic, TMX’s business lines benefitted, predominantly through increased trading and clearing, and equity financing activities. As economies begin to revert to a degree of normalcy, both in Canada and globally, TMX’s revenues are expected to continue this momentum in the short term in areas such as initial listings, secondary financing, and trust services, reverting to a more normal level over the longer term.

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 with a debt-to-EBITDA ratio of 1.8 times (x) and EBITDA interest coverage of 15.3x in 2020. The five-year average of all financial metrics points to a higher rating level, and is supportive of the Positive trend on the ratings.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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 30, 2021; https://www.dbrsmorningstar.com/research/377784), DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 2, 2020; https://www.dbrsmorningstar.com/research/369167), and DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 9, 2021; https://www.dbrsmorningstar.com/research/375001). Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

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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