-- 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)