DBRS Confirms Teranet Holdings LP’s Senior Secured Debt at BBB with a Stable Trend

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

Ontario (Province of Ontario or the Province; rated AA (low) with a Stable trend by DBRS) registration volumes continued to trend higher through 2016 when compared with 2015. Registrations grew by 7.1% compared with the same period in 2015. Revenue in 2016 continued to demonstrate momentum in all key areas, with a full-year increase of 15.4% from the prior year. Manitoba (Province of Manitoba; rated A (high) with a Stable trend by DBRS) operations represented approximately 9.0% of total revenue in 2016, totaling $31.2 million, and provided a positive EBITDA contribution of $18.3 million. Overall, 2016 EBITDA ended the year solidly, up 20.8%.

Normalized registrations continued to trend higher in H1 2017, growing by 6.3% from the prior year as a result of Ontario housing market activity and low-mortgage-rate environment. Total revenue in H1 2017 increased by 2.6%, while total expenses, excluding depreciation, were up modestly by 2.8%, resulting in EBITDA growth of 2.5% compared with the same period last year. Total revenue in H1 2017 was affected by royalties payable to the Province, which became effective on April 1, 2017, and which have been netted against revenue. Continued strength in Ontario operating performance supported solid debt service coverage ratio (DSCR) metrics, with the DSCR increasing to 2.26 times (x) from 1.92x in 2015. Total Company DSCR increased to 2.36x from 1.97x for the same period. On an H1 2017 trailing 12-month basis, the DSCR increased to 2.29x from 2.09x compared to H1 2016. According to the Company’s base-case forecast (which calls for roughly 1.5% growth in registration activity), the average DSCR (including royalty obligations but excluding Manitoba operations) is expected to be roughly 1.88x from 2017 to 2020. DBRS has assessed downside scenarios that consider the impact of a softening Ontario real estate market and derives comfort from the cushion available in the Company’s current financial credit metrics, which support the BBB rating.

The Government of Ontario introduced the Fair Housing Plan on April 20, 2017, with 16 measures aimed at cooling demand, addressing shortages of supply and promoting affordability in the provincial housing market. While it is still uncertain whether government measures aimed at balancing supply-and-demand pressures for housing in Ontario will be effective, Ontario housing market fundamentals, including labour markets, population growth and housing starts and completions, continue to show strength.

DBRS views Ontario’s economic and housing fundamentals as sound in the long term, although Teranet’s credit metrics could come under pressure in the near term if major housing markets in the Province, and specifically the Greater Toronto Area (GTA), demonstrate a large decline in registrations. A negative rating action could result from an economic downturn or from a protracted material softening of the real estate market, leading to markedly weaker financial metrics. Upward pressure on the rating is not expected at this time but could result from a prolonged period of volume growth, supportive of robust metrics.

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.

The principal methodology is Rating Public-Private Partnerships, which can be found on dbrs.com under Methodologies.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.