DBRS Places SNC-Lavalin’s BBB (high) Rating Under Review with Developing Implications

DBRS has today placed the Senior Debentures rating of SNC-Lavalin Group Inc. (SNC or the Company) at BBB (high) Under Review with Developing Implications. The rating action follows the Company’s announcement today that 2011 net profit would be $80 million or 18% below previously issued guidance and that the Company initiated an independent investigation of the facts and circumstances surrounding $35 million of payments documented to construction projects to which they did not relate.

DBRS recognizes that, by itself, the financial impact of the $80 million decrease in net profit is not material, considering that SNC would still expect to report about $350 million net profit, with strong company-level financial metrics and about $1.0 billion cash on hand (as reported on September 30, 2011). However, we are placing the rating under review because these latest developments could indicate possible deficiencies in the Company’s risk management and project control systems, including those related to offshore projects. DBRS will maintain the rating under review until we are able to conduct a more definitive assessment of the rating impact of these developments and the outcome of the independent investigations. In the review, we will also assess the potential impact of these developments on SNC’s financial strength, reputation and capability to win and execute on contracts.

At the completion of the rating review, DBRS could possibly confirm the BBB (high) rating and retain the Positive trend if we believe that the developments are isolated incidents, that the investigation reveals that any problems discovered in SNC’s risk management and project control are relatively minor and not difficult to correct, and that the financial impact does not deviate materially from the $80 million announced. To support this action, we expect SNC to continue the grow its more stable Services and Operations and Maintenance (O&M) businesses, maintain or strengthen its strong risk management and project control systems and maintain its solid financial profile in funding its growth on a sustained basis.

Alternatively, DBRS could confirm the rating but revise the trend to Stable from Positive. This could reflect a more material but still manageable impact of these developments on SNC’s reputation and business capability and also could depend on the Company’s formulating and executing an actionable plan to address the identified deficiencies in risk management and project control systems. Under this scenario, we expect SNC would maintain its current financial metrics.

Although not anticipated at this time, the review could lead DBRS to take a more negative rating action, in the event that the currently identified issues indicate more widespread problems in SNC’s risk management systems or business model, which could cause material damage to the Company’s capability to acquire, manage or execute on new projects. Financial losses resulting in materially weaker financial metrics could also result in such negative action.

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.