DBRS Confirms SNC-Lavalin at BBB (high)

DBRS has today confirmed the rating of SNC-Lavalin Group Inc. (SNC or the Company) at BBB (high), with a Stable trend. The confirmation follows strong operating performance by the Company in 2008, with notable earnings contributions from its Infrastructure & Environment and commodity-related Packages and Services businesses. SNC is well positioned to withstand the impact of weak macroeconomic and commodity market conditions, primarily given its well-diversified base of revenues, large backlog and strong balance sheet.

DBRS expects SNC to generate favourable operating performance over the near term, despite facing various headwinds. The Company’s large backlog ($9.6 billion at end-2008) and increasing share of Services as a proportion of consolidated revenue are likely to contribute to earnings growth in 2009. Services has historically generated higher margins than Packages and is generally viewed as less risky. Growth is expected from the Power segment (following the completion of problematic projects, notably Goreway) and a robust global infrastructure market. These segments should offset the impact of weaker Mining & Metallurgy and Chemicals & Petroleum operating results, albeit from strong 2008 levels. Relatively stable contributions from SNC’s Operations & Maintenance and Infrastructure Concessions Investments businesses, which are predominantly based in Canada, are also likely. Importantly, DBRS remains comfortable with the Company’s risk management policies.

SNC’s financial profile has improved over the past year and its balance sheet has remained conservative, with limited recourse debt and strong liquidity. However, the rating also takes into account the Company’s exposure to commodity and economic cycles, and the industry-related risks mainly associated with fixed-price contracts. The Company is well positioned to manage the current downturn over the near term for the reasons cited above. However, there remains a high degree of uncertainty regarding the severity and duration of the economic recession affecting many of SNC’s core markets.

Large order cancellations and sharply lower demand for new projects could weaken the Company’s financial profile beyond 2009, particularly in light of the financing challenges faced by many clients within the engineering/construction industry. In addition, there remains uncertainty regarding further capital contributions by SNC for the Ambatovy project in Madagascar (although this is not expected to be an issue). That said, earnings and cash flow are currently very strong for the rating and the Company’s significant cash position and low debt do provide downside protection. SNC is likely to maintain its solid liquidity position over the near term, which provides financial flexibility. While future concessions and/or acquisitions are likely, the Company is committed to maintaining a strong balance sheet.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Engineering and Construction Companies, which can be found on our website under Methodologies.

This is a Corporate rating.