DBRS Morningstar Confirms TMX Group Limited at AA (low) and R-1 (middle) With Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Long-Term Issuer Rating and the Senior Unsecured Debt rating of TMX Group Limited (TMX or the Group) at AA (low) as well as its Commercial Paper (CP) rating at R-1 (middle). The trend for all ratings is Stable. The Company’s Intrinsic Assessment (IA) is AA (low) and the Support Assessment is SA3, resulting in the Group’s Long-Term Issuer Rating being equalized with the IA. The Senior Unsecured Debt ranks pari passu with bank debt (none of which is outstanding) and, consequently, is set equal to the Long-Term 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 credit rating mapping. DBRS Morningstar assessed TMX using the “Global Methodology for Rating Non-Bank Financial Institutions” including Appendix D: TMX Group Limited (September 1, 2023); previously, it was assessed under the “General Corporate Methodology” including Appendix 3 – TMX Group Limited (March 25, 2022).

KEY CREDIT RATING CONSIDERATIONS
The rating confirmations and Stable trends 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 expanding its data and analytics business, which has both a leading domestic and international presence and provides an important source of recurring revenue. Earnings generation is strong, despite a challenging operating environment, and TMX’s leverage remains within its target levels, while financial metrics remain solidly within the current rating category. DBRS Morningstar also views the Group as having strong risk management capabilities and governance, which continue to be upgraded. This is important because DBRS Morningstar anticipates operational risk will become more challenging to manage as the Group grows in size and complexity.

CREDIT RATING DRIVERS
Given TMX’s high rating level, a further ratings upgrade is unlikely, especially considering the acquisitive nature of the Group. Conversely, the ratings would be downgraded if there is sustained deterioration in TMX’s financial metrics, including leverage, in line with a lower rating category. Additionally, any change in the Group’s debt structure resulting in structural subordination in its outstanding debt could result in a downgrade.

CREDIT RATING RATIONALE

Franchise Strength
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. TMX sourced 40% of its revenue in F2022 from outside of Canada, predominantly through its Global Solutions, Insights, and Analytics (GSIA) segment, as well as the Derivatives Trading and Clearing (DTC) segment which saw a large increase in U.S. revenue from the consolidation of BOX Options Market LLC (BOX; TMX has a 47.9% economic interest as of January 3, 2022). 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 pre-eminent position in many of its domestic business lines. The Group had a combined domestic equities trading market share in Toronto Stock Exchange (TSX)/TSX Venture Exchange-listed issues of 66% in Q2 2023 (58% for all listed issues in Canada).

Earnings Power
Despite a challenging environment for several of TMX’s businesses, particularly capital raising and equity trading, earnings have been resilient, reflecting the Group’s continued focus on growing GSIA and recurring revenue, which accounted for 34% and 53%, respectively, of total revenue in H1 2023. GSIA continues to perform well, with revenue increasing 16% year over year (YOY) in H1 2023, while DTC (excluding BOX) and TSX Trust also exhibited strong growth. Overall, adjusted net income attributable to equity holders increased by 1.3% YOY in H1 2023 to $210.7 million, while the same measure decreased by 0.5% YOY to $399.1 million in F2022. Elevated interest rates continue to weigh on capital raising activity, and timing for when the listing market will rebound remains highly uncertain, although a recent large equity sale in Canada and several notable U.S. initial public offerings are positive indicators in DBRS Morningstar’s view.

Risk Management and Governance
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, the Group has shifted to a hybrid work environment, which has strengthened resilience capabilities but could also increase cyber risk. However, TMX continues to enhance its operational and cyber risk capabilities by refining its enterprise risk management approach. 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.

Debt, Capitalisation, and Ownership
From a structural perspective, TMX has a stable and diversified shareholder base, including prominent participants in the North American investment industry. The Group’s operating subsidiaries have no externally issued debt (excluding operating/clearing lines), and as such 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 disruption to capital markets. Nevertheless, DBRS Morningstar does not anticipate that the holding company, TMX, would benefit from such intervention. The Group has, in the past, partially funded the acquisition of long-term strategic assets with CP issuance, including the December 2017 acquisition of Trayport Holdings Limited and the January 2023 investment in VettaFi Holdings LLC. While the CP backstop facility provides some comfort, in DBRS Morningstar’s view these assets would be more appropriately financed by longer-term debt.

Financial Metrics
DBRS Morningstar views the Group’s financial metrics as strong with a debt-to-EBITDA ratio of 1.3 times (x) (1.6x on an adjusted basis) and EBITDA interest coverage of 25.2x (20.5x on an adjusted basis) in F2022, as calculated by DBRS Morningstar. The five-year average of all financial metrics falls within the current rating level and supports the ratings confirmation.

DBRS Morningstar has renamed the Issuer Rating to Long-Term Issuer Rating to harmonize the nomenclature with other non-bank financial institutions.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) 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 (July 4, 2023) at https://www.dbrsmorningstar.com/research/416784.

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

The principal methodology is the Global Methodology for Rating Non-Bank Financial Institutions, including Appendix D: TMX Group Limited (September 1, 2023) https://www.dbrsmorningstar.com/research/420144. In addition, DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://www.dbrsmorningstar.com/research/416784 in its consideration of ESG factors.

The following methodologies have also been applied
-- DBRS Morningstar Global Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (February 24, 2023) - https://www.dbrsmorningstar.com/research/410196

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

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 credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

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 credit ratings are under regular surveillance.

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

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