March 1, 2012 / 9:02 PM / 5 years ago

TEXT-S&P raises TD Ameritrade Holding

Overview	
  -- TD Ameritrade Holding Corp.'s capitalization and cash-flow credit 	
metrics have improved, in our view.	
  -- As a result, we raised the issuer credit rating and the stand alone 	
credit profile on the firm to 'A' and 'bbb+', respectively. The outlook is 	
stable.	
  -- The firm's high tangible equity leverage limits further upgrade 	
potential. 	
  -- The stable outlook reflects our opinion that TDA will maintain a solid 	
financial profile with good operating cash-flow and debt service coverage.	
Rating Action	
On March 1, 2012, Standard & Poor's Ratings Services raised the issuer credit 	
rating (ICR) on TD Ameritrade Holding Corp. (TDA) to 'A' from 'A-'. The 	
outlook is stable. At the same time, we raised the stand alone credit profile 	
(SACP) on TDA to 'bbb+' from 'bbb'.	
	
Rationale	
The upgrades reflect the firm's improved financial profile, in particular the 	
growth in tangible equity and improved debt-to-EBITDA (to 1.1x) and 	
interest-coverage (38x) ratios.	
	
Our rating on TDA reflects both our view of the firm's SACP and its strategic 	
importance to Toronto-Dominion Bank (TD Bank; AA-/Stable/A-1+), which owns 45% 	
of the firm. The firm's good national retail brokerage franchise and low-risk 	
financial profile underpin the revised SACP. However, the firm's fairly high 	
tangible leverage, diminished but still material dependence on 	
transaction-based revenue, and high operating risk offset these positives. 	
Because we consider TDA strategically important to TD Bank, we incorporate two 	
notches of uplift in TDA's SACP to arrive at the issuer credit and debt 	
ratings.	
	
TDA has built a solid franchise through both organic growth and a successful 	
acquisition strategy. The firm's increased product offerings, which serve 	
investors' needs beyond trading, have helped expand the franchise, grow client 	
assets, and add more stable fee-based revenue. While TDA has a solid market 	
position and is among the leaders in the share of daily average revenue 	
trades, it is significantly smaller than the largest retail brokers in terms 	
of total client assets. Furthermore, equity market conditions heavily 	
influence the firm's client trade and margin lending revenue.	
	
The scalability of TDA's trading platform, which allows it to process a 	
high-volume of trades at low cost, has contributed to consistently strong 	
operating margins. This, coupled with a reduction in debt, has generated very 	
strong debt service metrics. This is impressive given that low interest rates 	
have hurt TDA's revenue and operating margins. 	
	
The firm takes on very little principal credit and market risk. Its liquidity 	
and funding are good, given the preponderance of free-cash, strong cash-flows, 	
and limited funding needs. We consider operational risk to be significant 	
because of the firm's high dependence on technology to support its brokerage 	
operations. 	
	
Although TD Bank does not provide specific financial support to TDA, we 	
believe that the firm's strategic importance to the banking group means that 	
support would be forthcoming if necessary. In addition, TDA benefits from its 	
relationship with TD Bank in that it shares technology and has a client cash 	
sweep program with the bank's wholly owned U.S. bank subsidiaries.	
	
Outlook	
The stable outlook reflects our opinion that TDA will maintain a solid 	
financial profile with good operating cash-flow and debt service coverage. We 	
could raise the rating if the adjusted-total-equity-to-managed assets 	
increased to 10%, and the firm grew its asset-based fees to at least 60% of 	
revenue. Should the firm's debt-to-EBITDA and debt service metrics deteriorate 	
to worse than 2x and 9x, respectively, we would likely lower the rating. We 	
could also lower the rating if TD Bank reduces its ownership in TDA or 	
otherwise causes us to reconsider its commitment to TDA.	
 	
Ratings List	
Upgraded	
                                     To                 From	
TD AMERITRADE Holding Corp.	
Counterparty Credit Rating	
  Local Currency                        A/Stable/--        A-/Stable/--	
 Senior Secured                         A                  A-	
 Senior Unsecured                       A                  A-	
	
 (Caryn Trokie, New York Ratings Unit)	
 

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