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

DBRS, Inc. (DBRS Morningstar) confirmed the Issuer Rating and the Senior Secured Debt rating 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 the Provinces of Ontario (Ontario) and Manitoba (Manitoba), healthy margins, and low capital needs but are constrained by the leverage and coverage ratios.

RATING RATIONALE/DESCRIPTION
Teranet operates primarily in Ontario (rated AA (low) with a Stable trend by DBRS Morningstar), with operations in Ontario contributing 90.9% of total gross revenue in 2021. The remainder comes from its operations in Manitoba (rated A (high) with a Stable trend by DBRS Morningstar). Ontario’s total registration volumes in 2021 were 24.4% higher compared with those in 2020, as a result of the recovery in the real estate market after the peak of the Coronavirus Disease (COVID-19) pandemic, which was faster and stronger than DBRS Morningstar initially expected. Search and writs volumes in Ontario for 2021 also surpassed 2020, finishing 18.2% and 21.3% higher, respectively. Gross revenue increased by 21.8% in 2021 from the prior year.

The government's lifting of restrictions from the coronavirus pandemic had resulted in a surge in Ontario's and Manitoba's housing markets for 2021. As interest rates continue to rise briskly, housing market activity is showing signs of a marked slowdown. Although a market slowdown has been occurring, sales-related registration volumes in Q2 2022 remained strong from a historical perspective despite decreasing by 15% from the record high volumes reported in Q2 2021. The strength in volumes for the first half of 2022 was due to resales activity in Q1 2022 as buyers pulled purchases forward ahead of anticipated interest rate hikes based on the market-driven volume increase over the last two years. Ultimately, the 2021 debt service coverage ratio improved to 2.50 times (x), compared with 2020, and remained strong at 2.38x at June 30, 2022.

Near the tail end of 2021, Ontario’s housing market activity began to somewhat moderate, although it still remained strong relative to historical norms. However, because of the lack of supply in the market, market conditions are tighter and competition between buyers has heated up. The Toronto Regional Real Estate Board reported that the condominium apartment market segment in the Greater Toronto Area moved counter to the overall sales trend during 2021, with year-over-year growth in sales, continuing a significant recovery in 2022. However, the supply of homes is not keeping pace with demand, and the federal parties in the recent federal election have all made housing supply and affordability a key issue.

The Bank of Canada has indicated accelerated rate hikes are likely by YE2022, which is currently leading to a negative effect on real estate market activity, as well as on refinancing and stand-alone 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 protracted material softening of the real estate market. However, such rating action is unlikely given the strong registration volumes in 2021 followed by the return of registration volumes to more seasonal norms in 2022.

Additionally, the Company closed a bond offering of $500.0 million called Series 2022-1 through a private placement in Canada on February 23, 2022. The bonds bear interest at 3.719% per year, are payable semiannually, and mature on February 23, 2029. The Company incurred issuance costs of $2.8 million, which have been capitalized to the bond and will be amortized over seven years, using an effective interest rate of 3.808%, until the bond’s maturity date. On February 25, 2022, the Company used a portion of the proceeds from the issuance of the Series 2022-1 senior secured bonds to redeem early the full $200.0 million principal balance on the Series 2015-1 senior secured bonds at a net redemption cost of $204.6 million.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no environmental, social, and governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

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

The principal methodology is Global Methodology for Rating Public-Private Partnerships (August 30, 2022; https://www.dbrsmorningstar.com/research/402155), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions.

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.

The conditions that lead to the assignment of a Negative or Positive trend are generally 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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