DBRS Comments on SNC-Lavalin Group Inc.’s PPP Projects

In light of today’s rating action on SNC-Lavalin Group Inc. (SNC), whose rating trend was changed to Negative from Stable, DBRS wishes to clarify its position regarding SNC’s public-private partnership (PPP) projects. DBRS rates three PPP projects for which SNC is the parent guarantor: SNC-Lavalin Innisfree McGill Finance Inc., the funding vehicle for the McGill Hospital design-build-finance-maintain (DBFM) project in Montréal; 407 East Development Group, charged with the Highway 407 eastern extension DBFM project east of Toronto; and Rainbow Hospital Partnership, responsible for the Restigouche Hospital DBFM project in Campbellton, New Brunswick.

The rating of the parent guarantor is a key factor taken into account by DBRS when analyzing PPP projects. Per DBRS’s methodology, the parent’s creditworthiness forms the foundation of the construction phase rating, provided that suitable liability caps and accompanying parent guarantees exist, as the construction contractor and, ultimately, its parent guarantor assume all risks and responsibilities related to construction of the project. As such, an adverse rating action at the parent guarantor level generally affects the rating of the project.

However, in certain circumstances, an adverse rating action at the parent guarantor level would not be mirrored in the rating of the project. Some projects may carry security packages notably in excess of that required for the rating during construction. Although unusual, such cases are characterized by a service phase that is weaker than the construction phase and determinative of the project’s rating. Where there is sufficient excess performance security, DBRS may choose not to take rating action on the project. Another instance is where a significant portion (more than 75%) of the construction task has been completed without material issues. DBRS may then choose to not take a rating action at the project level if it is highly confident that the project will achieve substantial completion at or near the target date.

As such, the Negative trend assigned to SNC earlier today has affected only the rating of SNC-Lavalin Innisfree McGill Finance Inc., as explained below. For more information, please see the press releases published today on each respective credit.

SNC-LAVALIN INNISFREE MCGILL FINANCE INC.
DBRS has confirmed the rating of SNC-Lavalin Innisfree McGill Finance Inc. at A (low) but changed the trend to Negative, from Stable. The trend change primarily stems from the action taken at the parent, but also reflects the continuation of significant delays on the project as well as the various issues that have plagued schedule recovery over the last year and the reticence of the Hospital to accept responsibility for certain variations and supervening events that have contributed the schedule erosion.

407 EAST DEVELOPMENT GROUP
DBRS has confirmed the rating of 407 East Development Group at A (low) and the trend remains Stable, supported by the construction security package that includes a 10% letter of credit (contingent upon the parent’s rating level) and an appropriate parent guarantee. The security package would allow the project to absorb a potential one-notch downgrade in the rating of SNC.

RAINBOW HOSPITAL PARTNERSHIP
DBRS has confirmed the rating of Rainbow Hospital Partnership at A (low). The trend remains Stable, supported by a security package that includes a 9% letter of credit, 100% performance bonding and 50% labour and materials bonding. This allows the project to absorb a potential one-notch downgrade in the rating of SNC, despite the eight-week delay that continues to persist.

Note:
The applicable methodology is Rating Public-Private Partnerships, which can be found on our website under Methodologies.