DBRS Limited (DBRS Morningstar) upgraded the ratings of TMX Group Limited (TMX or the Group), including its Issuer Rating and Senior Unsecured Debt rating to AA (low) from A (high) and its Commercial Paper (CP) rating to R-1 (middle) from R-1 (low). Additionally, DBRS Morningstar changed the trends on all ratings to Stable from Positive. 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 long-term to short-term rating mapping.
KEY RATING CONSIDERATIONS
The upgrades and Stable trends recognize TMX’s successful execution of its strategy to expand its businesses, improve revenue, and enhance efficiencies (including technology), while maintaining leverage within target levels.
The rating confirmations reflect TMX’s strong franchise with leading domestic market positions across a diversified set of businesses, including exchanges and clearinghouses. 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 revenue. 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, which continue to be upgraded. This is important as DBRS Morningstar anticipates operational risk will become more challenging to manage as the Group grows in size and complexity. The ratings also incorporate TMX’s trends in financial metrics, which demonstrate an ability to meet strategic targets.
Given TMX’s recent ratings upgrade and high rating level, a further ratings upgrade is unlikely. Conversely, the ratings would be downgraded if there is sustained deterioration in TMX’s financial metrics in line with a lower rating category. Additionally, 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.
TMX is the leading provider of listing, 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 31% of its revenue in F2021 from outside of Canada, predominantly through its Global Solutions, Insights, and Analytics segment. The Group faces competition from exchanges and other service providers seeking to enter the Canadian market. However, barriers to entry are high, given TMX’s preeminent position with a combined domestic equity trading market share in Toronto Stock Exchange (TSX)/TSX Venture Exchange-listed issues of 65% for H1 2022. 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 recurring revenue, which contributed 50% of revenue in F2021. Meanwhile, cost-saving initiatives and system and process modernization over the past few years continue to drive growth in operating income, which rose by 5% from the previous year to $280.1 million in H1 2022. TMX’s business lines had benefitted throughout the Coronavirus Disease (COVID-19) pandemic predominantly through increased trading and clearing and equity financing activities however revenue is expected to revert 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 become more of a challenge. Furthermore, its reliance on remote access for systems as companies work around imposed coronavirus lockdowns could increase cyber risk. However, the Group continues to enhance its operational and cyber risk capabilities by refining 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 TSX, 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 1.7 times (x) and EBITDA interest coverage of 16.9x in 2021. The five-year average of all financial metrics falls within the higher rating level and supports the rating upgrades.
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).
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies are the General Corporate Methodology, including Appendix 3 – TMX Group Limited (March 25, 2022; https://www.dbrsmorningstar.com/research/394214/); DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (October 29, 2021; https://www.dbrsmorningstar.com/research/386615/); and DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 1, 2022; https://www.dbrsmorningstar.com/research/393065/).
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 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.
The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.
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