DBRS Confirms Teranet Holdings LP Senior Secured Debt at BBB, Stable

DBRS Limited (DBRS) has today confirmed the Senior Secured Debt rating of Teranet Holdings LP (Teranet or the Company) at BBB with a Stable trend. The rating is supported by the Company’s monopoly position, healthy margins and low capital needs, but is tempered by softness in transaction volumes and high household debt levels.

Teranet’s 2014 performance benefited from a strong fourth quarter with property registrations increasing by 0.6%, search volumes increasing by 0.8% and writs volumes increasing by 2.9%. Improved 2014 revenue was attributable to strong fourth quarter volumes in all key areas and the contribution of registration volumes from the Manitoba business that was acquired in early 2014. Manitoba operations represented approximately 9% of total revenue totaling $22.7 million and provided a positive EBITDA contribution of $12.7 million for the year. Operating expenses increased for 2014, mainly due to the incremental Manitoba expenses, although EBITDA ended the year up 9.4%. The Company also recorded a $369.0 million non-cash goodwill impairment charge in the third quarter of 2014, reflecting lower registration volumes in Ontario than originally expected, driven by the Company’s updated forecasting process that considers different registration types individually and different forecast horizons. As a result, the Company will transition away from using historical RAR as a forecasting tool.

Debt was unchanged during 2014 and the Company has no incremental debt needs for the near future. Interest coverage remained consistent to prior year as calculated by DBRS at 1.6 times (x). The DSCR, as calculated by the Company, increased to 1.75x from 1.71x in 2013 which remains above the highest covenant threshold. Differences in calculated DSCR and interest coverage reflect adjustments pertaining to transaction and special charges. The DSCR and interest coverage ratio exclude the Manitoba operations as it is not a designated subsidiary pursuant to the terms of the master trust indenture due to the general partner’s de minimus ownership of 0.005%.

The outlook of Ontario’s real estate market remains uncertain in 2015, highlighted by the widely divergent and changing opinions of market specialists. The weaker Canadian dollar, declining mortgage rates and the strengthening U.S. economy are expected to benefit economic growth in Ontario, although this is balanced against a record number of condo completions leading to possible unsold inventory in the near term tempering the real estate market as a whole. However, the positive trend in the last number of months of 2014 has continued in the first quarter of 2015 with registration volumes well ahead of budget of both the Company’s budget and the same period last year.

The Canadian Real Estate Association (CREA) forecast updated March 13, 2015, forecasts a 1.9% increase in Ontario sales activity which represents an upward revision to its forecast and is similar to the 1.8% growth forecast by the Canada Mortgage Housing Corporation (CMHC). In Manitoba, CREA is forecasting a 2.2% decline in re-sales while CMHC is forecasting a 1.6% increase. As such, DBRS is of the view that financial metrics will likely remain at moderate levels in the near term.

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

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 to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodology is Rating Public-Private Partnerships (March 2015), which can be found on our website under Methodologies.