DBRS Confirms Teranet Holdings LP at BBB (high)

DBRS has today confirmed the rating of BBB (high) with a Stable trend on the senior secured debt of Teranet Holdings LP (the Issuer), the financing vehicle unconditionally guaranteed by Teranet Inc. (Teranet or the Company). The rating remains supported by Teranet’s ownership of the Province of Ontario’s (the Province or Ontario) electronic land registry system (ELRS) and the electronic writs system (the Writs System) and the exclusive right to access the data in and operate these systems. Both the ELRS and the Writs System are necessary services that must be provided by the Province, resulting in strong and relatively resilient cash flow generation. Nonetheless, results remain subject to some cyclicality and are in large part a reflection of the health of the Ontario economy while limited fee-setting autonomy and a relatively heavy debt burden limit financial flexibility.

With the housing market in the province stronger in 2010, revenue was up 5.8% over the previous year, somewhat ahead of expectations. Growth in recurring operating expenses was also notable, owing to the full-year impact of costs associated with new contracts, although EBITDA still managed to increase by 9.4% 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.

Teranet’s 2011 third-quarter update points to softening financial results. Revenue is down 2.2% compared to the first nine months of 2010 as RAR activity declined by 2.3% to 31.9% on a year-over-year basis. Registration, search and writs volumes were all down compared to the previous year.

In the face of weakening search and registration activity, expenses increased markedly as the company incurred staffing and information technology costs associated with meeting its obligations under its agreements with the Province. Lower revenue and higher expenses pushed nine-month EBITDA down by 9.5%.

The company issued $1.575 billion of notes in 2010 with an additional $525 million issued in April 2011. The proceeds of these offerings were used to pay the Province $1.0 billion in consideration for the extension of Teranet’s exclusive right to operate the ELRS until 2067 and to repay intercompany debt. As of September 30, 2011, senior debt totalled $2.1 billion, a level that is not expected to have changed in the days since. DBRS expects the DSCR to stand at approximately 1.90 times (x) at year-end 2011.

As virtually all Ontario properties are now part of the ELRS, future parcel growth will be dependent on the development of new properties and population growth. Teranet foresees growth of 1.6% to 1.8% annually going forward, compared with a long-term average of 2.4%, and a RAR gradually increasing to a long-term average of 37%. While the outlook is still viewed as a realistic over the medium term, DBRS notes that the considerable economic uncertainty prevailing globally may extend the soft operating conditions into 2012, causing EBITDA to weaken as statutory fees are frozen until 2015. However, with low capital expenditures and no new debt needs projected for the foreseeable future, the DSCR should remain above 1.7x, providing adequate flexibility to weather volatile operating conditions. DBRS expects the DSCR to recover to 2.0x by 2015.

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.