Morningstar DBRS Revises Trend on TMX Group Limited's Credit Ratings to Stable From Negative, Confirms Credit Ratings at AA (low) and R-1 (middle)

DBRS Limited (Morningstar DBRS) revised the trend on all credit ratings of TMX Group Limited (TMX or the Group) to Stable from Negative as a result of the progress made in deleveraging following the January 2024 acquisition of VettaFi Holdings LLC (VettaFi, subsequently renamed TMX VettaFi). Morningstar DBRS 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). 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 Morningstar DBRS' standard short-term to long-term credit rating mapping.

KEY CREDIT RATING CONSIDERATIONS
The credit rating action reflects TMX's material progress in deleveraging toward the top end of its current credit rating category range (i.e. debt-to-EBITDA of 2.5 times (x)) as of December 31, 2024. Morningstar DBRS expects the Group to return to its target leverage range of 1.5x to 2.5x ahead of its initial 24-month plan, with further deleveraging achieved through the repayment of outstanding CP.

The credit ratings are supported by TMX's strong franchise with leading domestic market positions across a diversified set of businesses, including exchanges and clearinghouses. The Group has successfully expanded its data and analytics business, which provides an important source of recurring revenue, resulting in strong earnings generation despite a continued challenging operating environment for some of TMX's business lines. Morningstar DBRS also views the Group as having strong risk management capabilities and governance.

CREDIT RATING DRIVERS
Given TMX's high credit rating level, a further credit ratings upgrade is unlikely, especially considering the acquisitive nature of the Group. Conversely, Morningstar DBRS would downgrade the credit ratings if there were sustained deterioration in TMX's financial metrics, including leverage, in line with a lower credit rating category. Additionally, any change in the Group's debt structure resulting in structural subordination in its outstanding debt could also result in a credit ratings downgrade.

CREDIT RATING RATIONALE
Franchise Strength
TMX is the leading provider of listing, trading, clearing, settlement, and depository services in Canada, where it enjoys significant market shares across a breadth of products within equities, fixed income, and derivatives. Additionally, the Group's Global Solutions, Insights, and Analytics (GSIA) segment, which has significant operations outside of Canada, has grown notably, primarily through growth in TMX Trayport and the addition of TMX VettaFi. As a result, TMX's proportion of revenue derived from outside of Canada increased to 50% in 2024, up from 41% in the prior year and in line with its long-term target. While the Group faces competition from exchanges and other service providers, barriers to entry are high given TMX's pre-eminent position in many of its domestic business lines. The Group had a combined domestic equities trading market share in Toronto Stock Exchange (TSX)/TSX Venture Exchange-listed issues of 63% in 2024 (down from 65% in 2023), or 57% for all listed issues in Canada (down slightly from 58%).

Earnings Power
TMX had strong earnings in 2024, with adjusted net income attributable to equity holders of $473 million (including earnings from TMX VettaFi but excluding the gain on fair value revaluation), up 16% from 2023. Revenues increased 22%, or 10% excluding acquisitions (i.e. TMX VettaFi, Newsfile Corp., and iNDEX Research and Development) with the GSIA segment growing 44%, or 11% excluding TMX VettaFi. GSIA now accounts for 41% of total revenue, up from 35% in 2023, and recurring revenue accounted for 55% of total revenue in 2024, up from 53%. Derivatives Trading and Clearing, as well as Equities and Fixed Income Trading and Clearing also contributed solid revenue growth of 20% and 9%, respectively, while the Capital Formation segment reported a modest 2% increase in revenue (0.3% decline excluding Newsfile), as macroeconomic conditions remain challenging for capital raising. Adjusted operating expenses increased 7% in 2024, primarily as a result of higher compensation, technology, and legal costs.

Risk Management and Governance
Risk management, reputational risk issues, and governance are critical for TMX's exchanges and clearinghouse operations. The Group uses various means to mitigate risk in its activities, including extensive controls, collateral agreements, margin arrangements, delivery versus payment processes, loss sharing by its members, the ability to assess members to cover losses, as well as legal super-priority positioning, which Morningstar DBRS views as appropriate. TMX's businesses do not actively take direct market risk as they are not making markets or taking proprietary positions in the markets they facilitate. As the Group grows across business lines and geographies, operational risks become more of a challenge. However, TMX continues to enhance its operational and cyber risk capabilities by refining its enterprise risk management approach. From a supervisory perspective, certain TMX subsidiaries have extensive oversight by various regulators at the provincial, federal, and international levels, providing an additional level of scrutiny at the operating subsidiary level.

Debt, Capitalisation, and Ownership
From a structural perspective, TMX is a public company with a wide ownership base. The Group's operating subsidiaries have no externally issued debt (excluding operating/clearing lines), and, as such, Morningstar DBRS generally conducts its analysis on a consolidated basis. Morningstar DBRS considers the importance of the Group's operations, including the Canadian Depository for Securities Limited and the TSX, to the Canadian financial system, which could potentially prompt government intervention in the event of a major disruption to capital markets. Nevertheless, Morningstar DBRS does not anticipate that the holding company, TMX, would benefit from such intervention.

Financial Metrics
TMX's debt-to-EBITDA ratio was 2.5x (2.6x on an adjusted basis) at December 31, 2024, as calculated by Morningstar DBRS, which has materially reduced from 3.4x (last 12 months basis, both adjusted and unadjusted) in Q1 2024, the first quarter following the TMX VettaFi acquisition. The Group is well on track to meet its commitment to return to a target range of 1.5x to 2.5x by the end of 2025 (debt to adjusted EBITDA was 2.7x at year-end 2024 as calculated by TMX). The top of this range coincides with the threshold of Morningstar DBRS' AA credit rating category. Deleveraging to date has been driven by EBITDA growth as well as debt repayment throughout 2024, including the partial cash repayment of the $300 million Series D debenture (the remainder was repaid with CP), and Morningstar DBRS expects that further deleveraging will be achieved through the repayment of outstanding CP.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781.

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

The principal methodology is the Global Methodology for Rating Non-Bank Financial Institutions (November 19, 2024) https://dbrs.morningstar.com/research/443208. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781 in its consideration of ESG factors.

The following methodology has also been applied:
Morningstar DBRS Global Corporate Criteria (February 3, 2025)
https://dbrs.morningstar.com/research/447186

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.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 dbrs.morningstar.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.

Morningstar DBRS 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. Morningstar DBRS' trends and credit ratings are under regular surveillance.

For more information on this credit or on this industry, visit https://dbrs.morningstar.com.

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