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

DBRS Limited (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 credit ratings continue to be supported by the Company’s position as an exclusive service provider in the Province of Ontario (Ontario or the Province; rated AA (low) with a Positive trend by DBRS Morningstar) and the Province of Manitoba (Manitoba; rated A (high) with a Stable trend by DBRS Morningstar), healthy margins, and low capital needs but are constrained by the debt service coverage ratio (DSCR).

Teranet operates primarily in Ontario, with operations in the Province contributing 90.8% of total gross revenue in 2022. The remainder comes from its operations in Manitoba. Ontario’s total registration volumes in 2022 were 10.6% lower compared with those in 2021, as a result of a slowdown in real estate transactions driven by the tightening interest rate policy measures to moderate persistent inflation. Search and writs volumes in Ontario for 2022 followed the same trend, finishing 11.1% and 18.4% lower, respectively. Gross revenue decreased by 6.3% in 2022 from the prior year, as contractual CPI-linked fee increase mechanisms served to mitigate the declines in volumes.

While the Bank of Canada raised the key policy overnight interest rate 10 times since March of 2022, it held the rate on September 6, 2023, at 5.0%, with a widely accepted view that central banks could begin to lower rates in the second half of 2024 or in 2025 depending on whether inflationary trends remain above the 2.0% target. Interest rates are expected to stay elevated for longer as resilient economic growth and persistent inflation pressure central banks to continue quantitative tightening measures. Persistent consumer demand, spending price and wage growth, and immigration levels have led to economic growth resulting in inflationary pressures and interest rate policy decisions. As interest rates trended upward beginning in March 2022, housing market activity showed signs of a marked slowdown. Ontario registration volumes declined 10.6% in 2022 when compared with 2021. The resultant DSCR declined to 2.0 times (x) in 2022 from 2.5x for 2021. Registration volumes continued to be negatively affected in early 2023 as the interest rate hikes persisted and began to trend upward when a pause in the rate hike cycle was announced, resulting in a lower DSCR of 1.7x at June 30, 2023, compared with 2.4x for the same period in 2022 (12-month trailing).

While the interest rate environment continues to have a negative effect on real estate market activity as well as on refinancing and stand-alone charge volumes, DBRS Morningstar notes that a negative rating action could result from a prolonged economic downturn or protracted material softening of the real estate market. DBRS Morningstar, however, views the Ontario real estate market along with other key Canadian housing markets to have shown resilience in the past as the supply of homes has not kept pace with demand, with housing supply and affordability remaining key issues for the government.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

There were no Environmental/Social/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/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (July 4, 2023).

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

DBRS Morningstar applied the following principal methodology:

Global Methodology for Rating Public-Private Partnerships (October 11, 2023) - https://www.dbrsmorningstar.com/research/421701/global-methodology-for-rating-public-private-partnerships

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

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.

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 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 trends and credit ratings are under regular surveillance.

Information regarding DBRS Morningstar credit ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at [email protected].

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