DBRS Morningstar Confirms Ratings on Teranet Holdings LP at BBB With Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and the Senior Secured Debt of Teranet Holdings LP (Teranet or the Company) at BBB with Stable trends. The ratings continue to be supported by the Company’s position as an exclusive service provider in Ontario and Manitoba, healthy margins, and low capital needs but are constrained by the leverage and coverage ratio.

Teranet operates primarily in Ontario (rated AA (low) with a Stable trend by DBRS Morningstar), with operations in Ontario contributing 90.5% of total gross revenue in 2020. The remainder is contributed by operations in Manitoba (rated A (high) with a Stable trend by DBRS Morningstar). Ontario total registration volumes in 2020 were 0.8% higher compared with those in 2019, as a result of the post-Coronavirus Disease (COVID-19) recovery of the real estate market, which was faster and stronger than DBRS Morningstar initially expected. Search and writs volumes in Ontario for 2020 also surpassed 2019, finishing 2.4% and 4.9% higher. Gross revenue increased by 3.0% in 2020 from the prior year.

The government restrictions from the coronavirus pandemic had resulted in a slowdown in Ontario’s and Manitoba's housing markets during the first half of 2020. Following downward pressure on registration volumes and financial performance, pent up demand driven by low borrowing rates resulted in particularly strong sales-related registration volumes in the second half of 2020 with overall registration volumes for the year remaining stable. The momentum continued in H1 2021, resulting in registration volumes in Ontario growing by 38.9% compared with H1 2019 (pre pandemic levels), which, together with the annual CPI-related fee increase, caused revenue to grow by 38.6% compared with H1 2019. Based on the market-driven volume increase in H2 2020, the debt service coverage ratio (DSCR) improved over 2019 to 1.92x at end of 2020, and further improved to 2.33x at June 30, 2021. Currently, the servicing of debt is interest only (IO), which introduces refinancing risk. To assess refinancing risk, DBRS Morningstar calculates the DSCR for a hypothetical debt refinancing considering that debt is fully amortized upon its maturity over the remaining life of the concession. DBRS Morningstar estimates the refinancing minimum DSCR remains suitable for the current rating category.

More recently, during July and August 2021, the real estate market activity in Ontario began to somewhat moderate, though still remained strong relative to historical norms. The Toronto Regional Real Estate Board (TRREB) reported the third-best sales result on record for the month of August. While the market has somewhat softened, demand for ownership housing remains strong. At the same time, the supply of listings is down. The result has been tighter market conditions and sustained competition between buyers. The condominium apartment market segment moved counter to the softening sales trend, with year-over-year growth in sales, continuing a significant recovery in 2021. However, supply of homes is not keeping pace with demand. The federal parties in the recent federal election have all made housing supply and affordability a key issue.

The Bank of Canada has indicated that its benchmark interest rate will remain at historical lows in the near term, which should continue to have a positive impact on real estate market activity, as well as on refinancing and standalone charge volumes. DBRS Morningstar noted in its last 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. However, the strong registration volumes in H1 2021 followed by the return of registration volumes to more seasonal norms in late Q3 2021 and into Q4 2021, make a negative rating action unlikely at this time.

On December 15, 2020, Teranet had issued $300 million 3.940% Series 2020-2 Senior Secured Bonds that were earlier successfully priced in the U.S. private placement market on May 21, 2020. The Company used the proceeds to refinance the remaining $300 million Series 2010-2 Senior Secured Bonds maturing on December 16, 2020. The Company had previously issued $550 million 3.544% Series 2020-1 Senior Secured Bonds in June 2020 maturing on June 11, 2025, and used the proceeds to early redeem $400 million of the $700 million Series 2010-2 Senior Secured Bonds, with the excess amount of $150 million to be used for general corporate purposes. Total debt as at June 30, 2021 was $2.3 billion.

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 methodology is Rating Public-Private Partnerships (August 19, 2021; https://www.dbrsmorningstar.com/research/383244), which can be found on dbrsmorningstar.com under Methodologies & Criteria. 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 by clicking on the link under Related Documents or by contacting us at [email protected].

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 trends and ratings are under regular surveillance.

DBRS Morningstar will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at [email protected].

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

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