DBRS Morningstar Changes Trends on TMX Group Limited to Negative From Stable, Confirms Credit Ratings at AA (low) and R-1 (middle), Following Announced Acquisition of VettaFi Holdings LLC

DBRS Limited (DBRS Morningstar) changed the trend on all credit ratings of TMX Group Limited (TMX or the Group) to Negative from Stable. DBRS Morningstar also confirmed the Long-Term Issuer Rating and the Senior Unsecured Debt credit rating of TMX at AA (low), as well as its Commercial Paper (CP) credit rating at R-1 (middle). These credit rating actions follow the Group’s announced plan to acquire the remaining 77.7% of the common units of VettaFi Holdings LLC (VettaFi), a leading U.S.-based, indexing, digital distribution, and analytics company. 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 and, consequently, is set equal to the Long-Term Issuer Rating. TMX 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.

KEY CREDIT RATING CONSIDERATIONS
The Negative trend reflects the expected deterioration in TMX’s financial metrics, including a material increase in leverage, resulting from the fully debt-financed acquisition of VettaFi. However, the credit ratings confirmation recognizes the Group’s proven ability to reduce its leverage following prior acquisitions such as Trayport Holdings Limited (Trayport) within a reasonable time frame, and TMX’s intention to do the same after this acquisition. In confirming the credit ratings, DBRS Morningstar also recognizes the strategic rationale for the acquisition, which, similar to the 2017 acquisition of Trayport, will enhance the Group’s fastest growing segment, Global Solutions, Insights and Analytics, grow its recurring revenue streams, and provide geographical diversification. TMX estimates that about 56% of revenues will be recurring following the transaction (up from 53%), bringing it closer to its stated long-term goal of over two thirds, and 46% of revenue will be generated outside of Canada (up from 41%).

CREDIT RATING DRIVERS
Given the Negative trend, a credit ratings upgrade is unlikely. DBRS Morningstar would change the trend to Stable if TMX makes sufficient progress deleveraging toward the top end of their current credit rating category range and successfully terms out a portion of the acquisition-related short-term borrowings.

DBRS Morningstar 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
In January 2023, TMX made a strategic investment in VettaFi, acquiring 21.3% of common shares for $175 million. Subsequently, in April 2023, the Group sold 100% of its interest in SigmaLogic Inc., a U.S.-based provider of analytics and portfolio tools, in exchange for an additional 1.0% stake in VettaFi. On December 13, 2023, TMX announced it has agreed to acquire the remaining 77.7% of the common units of VettaFi for $848 million (CAD 1.15 billion). The transaction is to be fully financed with approximately $1 billion in committed bank term loans, split into three tranches consisting of approximately $600 million, $200 million, and $200 million maturing 12, 18, and 24 months from closing, respectively.

While this financing plan will significantly increase leverage to approximately 3.5 times (x) after closing and repayment of VettaFi debt, the Group has previously demonstrated an ability to pay down transaction-related debt within reasonable time frames through free cash flow, reflecting the recurring nature of a significant portion of its revenue base and strong market positions. TMX plans to deleverage over 24 months, and DBRS Morningstar will closely monitor the Group’s progress in this regard. TMX is purchasing a long-term strategic asset with relatively short-term loans, which DBRS Morningstar has previously noted as a concern, following the issuance of CP to partially fund the Trayport acquisition and the initial VettaFi investment. However, some mitigation is provided in the current VettaFi transaction, as the Group plans to convert approximately $600 million of the term loans to longer term debentures in F2024. DBRS Morningstar notes that TMX’s operating subsidiaries have no externally issued debt (excluding operating/clearing lines) and expects any outstanding debt at VettaFi to be retired shortly after transaction close, allowing analysis to be conducted on a consolidated basis.

Positively, the transaction is expected to be accretive to adjusted earnings per share in the first year, before any synergies. Revenue synergies can be captured through leveraging the Group’s relationships to expand VettaFi’s offerings into new markets, particularly Canada, as well as through the development of new products.

DBRS Morningstar sees the transaction as carrying low execution risk, especially considering TMX’s familiarity with VettaFi given their current relationship, as well as the Group’s experience successfully integrating previous acquisitions.

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 U.S. 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 (July 4, 2023) 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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