The head of the London Stock Exchange Group PLC on Tuesday said the higher debt needed by Maple Group Acquisition Corp.'s plan to buy Canadian exchange operator TMX Group Inc. would raise the risk of TMX getting a credit rating downgrade.
LSE Chief Executive Xavier Rolet also questioned why the Canadian banks backing Maple are keen on using leverage to fund their bid when they know that "excessive leverage" was one of the factors which led to the global financial crisis.
The comments come just two days before LSE and TMX shareholders are due to vote on the proposed transatlantic merger of their companies.
It also comes in reaction to a comment from Maple, which said Monday that the estimated debt level of about 2.9 times earnings before interest, taxes, depreciation, and amortisation, or Ebitda, which TMX would have if it were acquired by Maple is within a regulatory limit of four times and is "well within the 3.5 times debt covenants the current board negotiated."
Part of Maple's plan is to merge TMX with its rival Alpha Group, Canada's largest alternative trading platform, and CDS Inc., the clearing and settlement hub for equities.
Maple's Block has said that Maple's plan is for TMX to keep generating "significant amounts of cash," giving it "ample capacity to pay down debt and reduce leverage to two times within two years if the new board chose to do so."
Rolet said that with the special dividend proposed last week by LSE and TMX for their shareholders, TMX's leverage would rise "slightly" from around 0.7 times to 1.4 times Ebitda, "which is still within the leadership group of the best exchanges like the CME Group or Deutsche Boerse, who have conservative levels of leverage."
"The lesson that we're learning--and Canada should know this because they've outperformed the rest of the world--is about the inability to manage leverage."
"Excessive leverage just destroys financial services institutions. Given the firepower of these institutions (in Maple), why are they putting so much equity into the deal?," he said.
Rolet also reiterated that Canadian regulators will have oversight on financial products in Canada even if the LSE and TMX merge.
The Wall Street Journal reported recently that Mark Carney, governor of the Bank of Canada, suggested that he would need to be comfortable that a tie-up of the LSE and TMX wouldn't interfere with the central bank's ability to regulate the clearing of Canadian financial products. The central banker didn't address the TMX-LSE tie-up directly.
