Capital Markets

Moody’s Lifts TD Ameritrade from Junk Heap

Credit rating service upgrades brokerage firm's senior secured to Baa3 from Ba1, in a move that goes against the lower-ratings grain.
Stephen TaubJanuary 21, 2009

TD Ameritrade Holding debt traded up from its junk status, as Moody’s Investors Service issued a relatively rare upgrade in the case of the brokerage firm.

The credit rating service boosted the rating to Baa3 from Ba1 on TD Ameritrade’s senior secured rating facilities. That enabled it to achieve rising star status – moving from below investment grade to an investment-grade credit. Moody’s also assigned a first-time issuer rating of Baa3 to the company. The ratings continue to be on review for a possible upgrade.

Moody’s said the primary reason for the upgrade is “the significant improvement in the operating fundamentals” of TD Ameritrade over the last several years, citing the company’s strong earnings generation ability, high profit margins and resultant credit metrics. More specifically, Moody’s said that TD Ameritrade’s cash flow leverage, of about one-times cash flow, and interest coverage of over 18 times, provide it with “a meaningful degree of financial flexibility.” Moody’s said that this is particularly critical during the current period of macroeconomic and financial market uncertainty.

“The durability of TD Ameritrade’s credit metrics is supported by the company’s improved earnings diversification, efficient operating platform, and strong competitive position in the online brokerage industry,” said Moody’s analyst Alexander Yavorsky.

Moody’s did point out a number of risks for the company, including the possibility of a potentially sharp slowdown in customer trading activity in the coming quarters, and downward pressure on net interest margin and interest earnings balances. Even so, Moody’s believes that TD Ameritrade’s debt service capacity and credit profile should remain resilient and consistent with its assigned ratings. This includes possible, though less likely negative scenarios, under which pre-tax earnings may decline by half, it added.

Moody’s said that TD Ameritrade’s ratings continue to receive one notch of support from its close relationship with Toronto Dominion, its largest shareholder. The Canadian bank has announced its intention to increase its stake to 45 percent from 40 percent in the coming months. “In addition to TD Ameritrade’s strategic importance to TD, the latter also exercises an important degree of oversight and control over TD Ameritrade, which Moody’s views as beneficial to the company’s risk profile,” it added.

At the end of the September quarter, TD Ameritrade had about $1.44 billion in long-term debt. Earlier this month, the company announced plans to acquire brokerage thinkorswim Group Inc. for $606 million in cash and stock. It expects the deal to close within the next six months.

Upgrades – especially rising stars – are unusual during an economic downturn. In December, Moody’s counted six global rising stars, including four in the United States: Allegheny Energy Supply, Allied Waste North America, Browning-Ferris Industries, and IKON Office Solutions Inc. By contrast, there were 10 fallen angels — companies whose debt was cut to junk from investment grade. Eight of those companies were based in the U.S.

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