S & P Raises Teranet's Rating to AA-
Research Update: Teranet Inc. Rating Raised To 'AA-' On Strength Of Financial Performances; Outlook Stable
Rationale
On Dec. 16, 2005, Standard & Poor's Ratings Services raised its long-term issuer credit and senior secured credit ratings on electronic land registrar Teranet Inc to 'AA-' from 'A+' on the continuing strength of its financial performances. At the same time, Standard & Poor's raised the company's
long-term junior unsecured debt ratings to 'A+' from 'A'. The outlook is stable.
The ratings reflect that Teranet once again produced a strong financial performance in fiscal 2005 (year ended March 31) as its EBITDA-based senior debt service coverage ratio (DSCR) rose to 7.4 times (x) from 5x a year earlier. The EBITDA-based junior DSCR fell to 2.4x from 2.6x a year previous despite the strengthened financial performance as the company incurred its first full year of debt service costs for its recently issued junior bond. The total DSCR also increased reaching 2.9x in 2005 (2.2x a year earlier). Teranet's financial 2006 results are expected to improve further as the Ontario housing market records another very strong performance in 2005.
The housing market in southern Ontario, which is the key driver for Teranet's revenues, continues to surprise with its strength and longevity of demand for resales and new housing. Although interest rates have begun to move off the historic lows seen in the past two years, the rise has not been precipitous to
date and the moderation of the Ontario real estate market that was expected at the end of 2004 did not materialize in 2005. Nevertheless, it is expected that interest rates will continue their slow but steady climb in 2006 and the pace of housing starts and resales should begin to moderate.
Teranet is the exclusive provider until 2017 of two property conveyance services, both of which are essential to the functioning of the province's real estate markets. The Ontario government, which was once a former co-owner of Teranet, is broadly supportive of the company. In 2003, it renegotiated new agreements covering future expansion of the land registry database and the length of the
exclusive concession period that are beneficial to Teranet. The province will retain an active interest in Teranet in the future due to the importance of the real estate market to Ontario's economy.
These strengths are tempered by the increasing certainty that Teranet will have to refinance its entire C$280 million senior secured bullet issue in 2009.
The company at this time has no established debt reduction funds that would allow it to only have to refinance a portion of the C$280 million issue. Some deceleration of revenue growth is expected in fiscals 2006 and 2007 as a result of the slow but steady climb of interest rates and the consequent
moderation of Ontario real estate activity expected in 2006.A more significant increase in interest rates or a substantial economic decline in Canada, however, could slow down the Ontario real estate market dramatically and prevent the company from achieving revenue and free cash flow projections.
This risk is mitigated, however, by the likelihood that the company would expeditiously impose cost containment measures to achieve its cash flow targets.
Cash and investment balances were significantly reduced in fiscal 2005 as a result of a two special cash payments of about C$110 million. Cash balances are expected to improve significantly in fiscal 2006.
There is uncertainty at this time as to the nature of the future ownership of the company and when an ownership change might occur. In the short term, Teranet's ability to take advantage of long-term investment opportunities could be hampered by change-in-ownership considerations.
Outlook
The stable outlook reflects the expectation that Teranet will continue to produce strong financial results from the operations of its electronic land registry services. Debt service coverage ratios are also expected to remain robust. Although real estate activity levels should remain healthy in 2006, some moderation of the pace of activity in the Ontario real estate market is expected and revenue growth should decelerate modestly in fiscal 2006 as a result. Liquidity levels are expected to continue to be more than adequate,
although they should remain at levels below those seen in recent years.
Standard & Poor's considers it likely that the company's ownership structure will change within the outlook time horizon. A sharp decline in real estate market activity that leads a decline in revenues and debt service coverage levels or a deterioration in the company's relationship with the province of Ontario could lead to downward pressure on the ratings on Teranet. Conversely, continued improvement in debt service
coverage levels is a definite precondition to the ratings being raised.
Ratings List
|
Ratings Raised |
|
Teranet Inc. |
To |
From |
|
Issuer credit rating |
AA-/Stable/-- |
A+/Stable/-- |
|
Senior secured debt |
AA- |
A+ |
|
Junior subordinated unsecured debenture |
A+ |
A |
Complete ratings information is available to subscribers of RatingsDirect, Standard & Poor's Web-based credit analysis system, at www.ratingsdirect.com. All ratings affected by this rating action can be found
on Standard & Poor's public Web site at www.standardandpoors.com; under Credit Ratings in the left navigation bar, select Find a Rating, then Credit Ratings Search.