DBRS Rates Teranet Holdings Bond Issue BBB (high)

DBRS has today assigned a rating of BBB (high) with a Stable trend to the $525 million bond issue of Teranet Holdings LP (Teranet or the Company), which includes $250 million of ten-year notes and $275 million of 30-year notes. The rating is consistent with the one assigned by DBRS last December to the first part of Teranet’s $2.1 billion borrowing program, which included $475,000,000 of five-year senior bonds (Series 2010-1), $450,000,000 of ten-year senior bonds (Series 2010-2), $450,000,000 of 30-year senior bonds (Series 2010-3) and $200,000,000 of 20-year Real Return Senior Bonds (Series 2010-4). Proceeds will be used to repay outstanding indebtedness owed to affiliates and to pay all transaction expenses related to the offering.

Year-end results recently filed by the Company highlight sound performance for 2010. Total revenues increased by 5.8% year-over-year, somewhat ahead of expectations, mainly driven by stronger-than-expected parcel base growth and robust search activity. Growth in recurring operating expenses was also notable, owing to the full-year impact of various initiatives started the prior year, although EBITDA still managed to increase by 4.7% year-over-year (DBRS-adjusted). The search activity rate was solid throughout the year but the registration activity rate (RAR), which is the most significant driver of revenue, remained below historical levels, reflecting a larger parcel base and a modest slowdown in market activity in the middle of last year.

The medium-term outlook of the Company remains unchanged since the release of DBRS’s report in December. Teranet expects annual parcel growth to vary between 1.6% and 1.8% (compared with the last 37-year average of 2.3%), and RAR to increase gradually to a long-term average of 37% (compared with the last 37-year average of 40.1%). Operating margins should also benefit from growth over time as the cost base is largely fixed and Teranet has ambitions to pursue opportunities in core and value-added services businesses. With the conversion of properties complete, a static fee schedule combined with modest parcel growth and RAR assumptions should lead to slow growth in revenue and EBITDA from 2010 to 2015. A senior debt service coverage ratio (DSCR) of approximately 1.75 times (x) is anticipated in 2011, assuming $2.1 billion in debt, with the ratio improving to approximately 2.0x by 2015 as Teranet has no other borrowing plans beyond the current bond issue.

DBRS believes that these assumptions are realistic but notes that the cyclicality of RAR will likely create some volatility in operating results, causing the DSCR to fluctuate through economic cycles. DBRS expects that Teranet will return most of its free cash flow to shareholders on a regular basis and keep debt levels stable, although debt-to-EBITDA should improve gradually over the years as EBITDA grows steadily.

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

The applicable methodology is Rating Canadian Public-Private Partnerships, which can be found on our website under Methodologies.