DBRS Confirms SNC-Lavalin at BBB (high)

DBRS has today confirmed the Senior Debentures rating of SNC-Lavalin Group Inc. (SNC or the Company) at BBB (high) with a Stable trend. The rating largely reflects SNC’s leading global engineering and construction management capabilities (particularly in Canada), diversified revenue base and strong financial profile, but also takes into account the Company’s relatively high business risk related to its involvement with fixed-price contracts and equity investments in projects. The trend is Stable, as the Company’s core credit metrics and business risk profile are expected to remain relatively steady over the near term.

SNC generated solid growth in earnings and cash flow over the past year, roughly in line with DBRS’s expectations. The Company’s credit metrics remain strong and near historical average levels despite lower sales and the issuance of $305 million in recourse debt in 2009 (DBRS does not include non-recourse debt in ratio calculations). The diversification of the Company’s revenue base, in terms of both geography and end-market, played an important role in moderating the impact of weaker macroeconomic and commodity market conditions. Notable growth in operating earnings was generated from the Infrastructure/Environment and Power segments, with the latter solidly profitable following losses in each of the previous three years. Higher earnings from these segments more than offset weaker results in SNC’s more cyclical Chemicals/Petroleum and Mining/Metallurgy businesses. In addition, Infrastructure and Concession Investments and Operations/Maintenance have come to represent a material share of earnings and added stability. The Company’s backlog remains strong at $11.4 billion (March 31, 2010), and is expected to support modest near-term growth in earnings and operating cash flow.

SNC’s balance sheet and liquidity position remain strong. The Company has historically held large cash reserves, which provides a high degree of financial flexibility, and its equity base has roughly doubled since 2004 to $1.4 billion. The sizeable cash position and increased equity base help to mitigate the financial risk associated with potential cost overruns from fixed-price contracts that are characteristic of its Packages segment. Furthermore, SNC’s concessions portfolio (particularly its stakes in Highway 407 and AltaLink, L.P.) has a market value well in excess of its book value, and, if necessary, this portfolio could provide a large source of liquidity via dispositions. These factors help to strongly position SNC within the current rating, and limit downside risk.

The business risk facing SNC remains relatively high (albeit modestly improved), and is largely a function of its exposure to fixed-price contracts, industry cyclicality, and its use of equity investments in projects and concessions. While the overall share of Packages-related revenue and backlog has declined relative to pre-2008 average levels, it remains a significant share of total revenue and backlog at roughly 36% and 40%, respectively. Given recent large Packages contracts such as the McGill University Health Centre and the expectation of additional project wins, the proportion of Packages-related business is likely to increase over the near term. SNC has boosted its profitability following the large losses experienced from its Goreway thermal power plant project in 2007, but the risk of potential financial volatility remains. DBRS does, however, remain comfortable with the Company’s risk management capabilities.

Over the near to medium term, recourse debt-to-capital is not expected to exceed 30%. Core coverage ratios are likely to remain strong and roughly in line with 2009 levels. SNC is likely to remain acquisitive and invest equity in future infrastructure concessions, but liquidity will not be an issue.

Note:
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.