DBRS Confirms SNC-Lavalin at BBB (high), Changes Trend to Positive

DBRS has today confirmed the Senior Debentures rating of SNC-Lavalin Group Inc. (SNC or the Company) at BBB (high) and changed the trend to Positive from Stable. The rating action recognizes the Company’s improving business risk profile and ongoing solid financial profile. Its growing Services and Operations and Maintenance (O&M) businesses, which are more stable, have helped to lessen the influence of the more risky Packages business and lower the Company’s overall business risk. The rating will likely be upgraded a notch if (1) SNC can weather the current challenging market conditions, especially the turmoil in North Africa, and maintain its solid financial profile, and (2) the Company can also demonstrate that the current business mix, with steady-to-diminishing influence of its Packages business, is sustainable.

The Company’s business risk profile has improved progressively as its revenue mix has become more balanced. The Packages business is still SNC’s largest segment (based on revenue) but is well below its peak of about 55% in 2006. The fixed-price nature of the projects in Packages, although more profitable, exposes the Company to the risk of large losses due to cost overruns and, therefore, higher business risk. This is evidenced by the volatile earnings at Packages over the last few years, including a loss in 2007. The steady growth in the more stable Services and O&M businesses has reduced the Packages segment to less than 40% of overall revenue in 2010. DBRS believes that a more balanced revenue mix with a larger portion of the more stable Services and O&M businesses reduces SNC’s overall business risk. In addition, the Company operates in a variety of industries and is reasonably diversified geographically (46% outside of Canada), lessening the impact of adverse developments in any particular industry or region. This diversity helps to moderate the volatility of the Company’s operations.
The Company’s financial risk profile is above average among industrial peers. Operating performance has been on an improving trend, helped by a rapidly growing infrastructure and environmental business. The diversity of its business mix and efficient operations has enabled the Company to weather the recent sharp recession with minimal impact on earnings. The Company has demonstrated that it has the capacity to absorb unexpected large losses, such as that associated with the Goreway thermal power plant project in 2007, to remain profitable. The Company maintains a conservative financial policy, and its balance sheet leverage is modest (17% (excluding non-recourse debt) at the end of 2010). All debt coverage ratios are above the range for the current rating. The Company has strong liquidity with cash on hand of approximately $1.3 billion at the end of 2010. SNC also has significant equity investment in infrastructure projects. Some of those projects are worth significantly more than their book value and could easily be monetized. This adds to the Company’s financial flexibility.

In the near term, with a relatively healthy revenue backlog, the Company expects its 2011 net income to be comparable to 2010 (excluding some disposal gains). However, recent turmoil in North Africa, especially in Libya, has caused the Company to suspend all its operations there, which has negatively affected results in the first half of 2011. Nevertheless, DBRS expects the disruption in Libya to be manageable. Additionally, DBRS expects the Company to balance its revenue growth between the more profitable but riskier Packages business and the more stable Services and O&M businesses and maintain its current more stable business risk profile.

Furthermore, DBRS believes that SNC may have to inject substantial capital into AltaLink, L.P. (rated “A” and R-1 (low) by DBRS) to support the subsidiary’s capital spending on expanding its transmission network in the next few years. DBRS expects that SNC will be judicious in raising cash, if needed, to meet these funding needs and maintain a conservative financial profile.

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

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