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

DBRS Limited (Morningstar DBRS) confirmed the Long-Term Issuer Rating and the Senior Unsecured Debt credit rating of TMX Group Limited (TMX or the Group) at AA (low), as well as its Commercial Paper (CP) credit rating at R-1 (middle). The trend for all credit ratings is Negative. TMX'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 Morningstar DBRS' standard short-term to long-term credit rating mapping.

KEY CREDIT RATING CONSIDERATIONS
The maintenance of the Negative trends reflects TMX's elevated leverage, which resulted from the fully debt-financed acquisition of VettaFi Holdings LLC (VettaFi, subsequently renamed TMX VettaFi) in January 2024. However, the credit ratings confirmation also recognizes the Group's proven ability to reduce its leverage following prior acquisitions within a reasonable time frame, and TMX's intention to do the same after this acquisition. While Morningstar DBRS views positively the Group's success in terming out a majority of the acquisition-related short-term borrowings, only two quarters have passed since the acquisition, and more progress needs to be made toward deleveraging.

The credit ratings are further supported by TMX's strong franchise with leading domestic market positions across a diversified set of businesses, including exchanges and clearinghouses. The Group has successfully expanded its data and analytics business, which provides an important source of recurring revenue, resulting in strong earnings generation despite a challenging operating environment. Morningstar DBRS also views TMX as having strong risk management capabilities and governance.

CREDIT RATING DRIVERS
Given the Negative trend, a credit ratings upgrade is unlikely. Morningstar DBRS would change the trend to Stable if TMX makes sufficient progress deleveraging toward the top end of its current credit rating category range.

Morningstar DBRS would downgrade the credit ratings if leverage remains at elevated levels. 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. On January 2, 2024, TMX completed the acquisition of the remaining 77.7% common units in VettaFi, a leading U.S.-based, indexing, digital distribution, and analytics company. The addition of TMX VettaFi increased TMX's proportion of revenue derived from outside of Canada, which totalled 49% in H1 2024, up from 41% in F2023. While the Group faces competition from exchanges and other service providers, 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 64% in H1 2024 (down slightly from 66% in H1 2023), or 58% for all listed issues in Canada (unchanged).

Earnings Power
TMX's earnings remain resilient, as adjusted net income attributable to equity holders increased by 6% year over year (YOY) in H1 2024 to $224.2 million (including earnings from TMX VettaFi but excluding the gain on fair value revaluation), while the same measure increased by 2% YOY to $407.8 million in F2023. In addition to geographic diversification, the acquisition of TMX VettaFi is consistent with two key TMX strategic initiatives, including growth in the Global Solutions, Insights, and Analytics (GSIA) segment which accounted for 42% of total H1 2024 revenue, up from 35% in F2023, and increasing recurring revenue, which accounted for 55% of total revenue in H1 2024, up from 53% in F2023. GSIA revenue grew 44% YOY in H1 2024, or 10% excluding TMX VettaFi, primarily driven by continued strength in TMX Trayport. Growth was also solid in Derivatives Trading and Clearing, as well as Equities and Fixed Income Trading and Clearing, while the Capital Formation segment reported a 4% decline in revenue as macroeconomic conditions remain challenging for capital raising. Positively, the Group saw an increase in capital raising activity in Q2 2024.

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, loss sharing by its members, the ability to assess members to cover losses, as well as legal super-priority positioning, which Morningstar DBRS 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 is a public company with a wide ownership base. The Group's operating subsidiaries have no externally issued debt (excluding operating/clearing lines), and, as such, Morningstar DBRS generally conducts its analysis on a consolidated basis. Morningstar DBRS 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, Morningstar DBRS does not anticipate that the holding company, TMX, would benefit from such intervention.

Financial Metrics
As a result of the TMX VettaFi acquisition, which was financed with three tranches of term credit facilities totalling $1.27 billion, the Group's financial metrics currently fall outside of the AA credit rating range (with the exception of EBITDA interest coverage). The annualized debt-to-EBITDA ratio was 2.6 times (x) (2.7x on an adjusted basis) at H1 2024, or 3.1x on a last 12 months basis (3.1x adjusted), compared with 1.7x in F2023 (1.5x adjusted), as calculated by Morningstar DBRS. TMX remains committed to returning leverage to its target range of 1.5x to 2.5x by the end of 2025 (pro forma debt to adjusted EBITDA was 3.3x at June 30, 2024, as calculated by TMX). The top of this range coincides with the threshold of Morningstar DBRS' AA credit rating category. Positively, the 12-month $794 million term facility was repaid in February 2024 with the proceeds of a $1.1 billion debenture issuance with maturities ranging from 5.5 to 10 years. The remaining term facilities, with maturities of 18 and 24 months, totalling $481 million, were repaid in May 2024 with a combination of CP and the proceeds of a two-year $300 million debenture.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

There were no Environmental, Social, or Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781.

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

The principal methodology is the Global Methodology for Rating Non-Bank Financial Institutions (September 4, 2024) https://dbrs.morningstar.com/research/438927. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781 in its consideration of ESG factors.

The following methodology has also been applied:

-- Morningstar DBRS Global Corporate Criteria (April 15, 2024) https://dbrs.morningstar.com/research/431186

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.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 https://dbrs.morningstar.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.

Morningstar DBRS 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. Morningstar DBRS' outlooks and credit ratings are under regular surveillance.

For more information on this credit or on this industry, visit https://dbrs.morningstar.com.

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