DBRS Confirms SNC-Lavalin at BBB (high) and Changes Trend to Negative

DBRS has today confirmed the Issuer Rating and Senior Debentures rating of SNC-Lavalin Group Inc. (SNC or the Company) at BBB (high) and has changed the trend on the ratings to Negative from Stable.

The rating action reflects DBRS’s view that SNC will face continued operational challenges in its effort to improve its risk management system and corporate governance culture, which is crucial to maintaining a strong business risk profile consistent with its current rating. The events of the past two years have clearly indicated that SNC’s risk management practices under the previous management team were weaker than originally expected, while its exposures to high-risk countries with developing political and ethical frameworks more than offset the benefits of business diversification and its experience at operating in those markets.

As SNC has made substantial management changes and efforts to improve the Company’s corporate governance and risk management system in the past year, DBRS believes that the next 12 months to 18 months will be crucial to the Company’s future direction. While the current management team pushes for internal changes, SNC will still need to manage numerous challenges, which include containing existing and potential problems arising from its legacy contracts, restoring its reputation and rebuilding a track record of sustained profitability. In addition, the Company’s earnings may be affected as it implements tighter risk control and becomes more selective in projects from high-risk regions.

As SNC’s business risk profile and previous risk management practices are viewed as weak for the rating, DBRS would likely downgrade SNC’s rating by one notch to BBB if these challenges distract or delay management’s effort to achieve an improved risk management culture and systems. The downgrade could also happen if one of the following circumstances further erodes the Company’s business risk profile or profitability. These circumstances could include, but are not limited to, (1) SNC materially increases its exposure to high-risk developing countries beyond the legacy contracts, (2) the Company reports significant additional and unexpected losses arising from legacy projects, (3) there are material punitive actions by regulators or government authorities against the Company due to offences committed by the previous management team, (4) there are major departures from the current executive management team and (5) any current executive manager becomes implicated in any unethical practices or risk management failure.

Despite the challenges, DBRS recognizes that SNC still possesses valuable assets in its key infrastructure concession investments, engineering and project delivery capabilities in its core segments (particularly in power, mining and metallurgy and oil and gas) and low recourse debt levels. Maintenance of these credit strengths will remain critical to SNC’s rating.

Conversely, DBRS may consider changing the trend back to Stable if the Company is able to demonstrate consistent implementation of its new and improved risk management, governance and compliance practices, evidence of which could include (1) materially reduced exposure to high-risk countries and contracts, (2) a sustained period of improved profitability and backlog growth and (3) absence of further material project losses from both legacy and new contracts awarded.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Companies in the Engineering and Construction Industry (August 2013), which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.