DBRS Downgrades SNC-Lavalin to BBB and Trend Remains Negative

DBRS has today downgraded the Issuer Rating and Senior Debentures rating of SNC-Lavalin Group Inc. (SNC or the Company) to BBB from BBB (high). The trend for both ratings remains Negative. The rating action follows the Company’s announced substantial revision of profit guidance for full-year 2013 to within the $10 million to $50 million range on October 15, 2013, from previous revised guidance of $220 million to $235 million issued in conjunction with its release of Q2 2013 financial results. DBRS understands that the earnings revision was caused by a combination of (1) additional provisions due to cost reforecasts on certain unprofitable legacy fixed-price projects following its internal project portfolio evaluation, (2) additional charges related to SNC’s European operations and (3) weak market conditions affecting profitability of its Mining and Metallurgy division.

The rating downgrades reflect DBRS’s view that the announced substantial charges and provisions are further indications that the legacy projects and problems from the former management may be larger than previously expected, difficult to predict and have the potential of distracting current management from its effort to restore SNC’s profitability and reputation.

While recognizing SNC’s management change and efforts to improve the Company’s corporate governance and risk management system in the past year, DBRS changed the trend on SNC’s ratings to Negative on August 28, 2013, and expressed its concerns that these efforts could be distracted by the numerous challenges facing the Company. The challenges included containing existing and potential problems arising from its legacy contracts, restoring its reputation and rebuilding a track record of sustained profitability (see DBRS’s press release “DBRS Confirms SNC-Lavalin at BBB (high) and Changes Trend to Negative,” dated August 28, 2013, for details). DBRS also indicated that SNC’s ratings would likely be downgraded by one notch to BBB if circumstances arose that would further erode SNC’s business risk profile or profitability, and could potentially distract or delay management’s effort to achieve an improved risk management culture and systems. DBRS considers the recent announcement of significant additional and unexpected provisions arising from legacy projects as one of such circumstances, even though the provisions and charges may be necessary to reflect the fair value and profitability of its operations and projects. Although it is possible that some of these and other previously taken provisions may be reversed at the completion of related projects and discharge of the related claims, there is limited certainty or visibility on whether, when and how much of such provisions will be reversed.

In maintaining the Negative trend, DBRS upholds its view that the challenges remain relevant and the next 12 months to 18 months will be crucial to the Company’s direction. DBRS expects that the additional provisions should adequately reflect the expected losses from legacy projects and will review the situation again when the full-year 2013 audited financial results are released. The BBB ratings could be pressured if the Company fails to persist with its current management efforts in improving its risk management culture and in restoring sustained profitability from 2014 onward.

If SNC is able to sustain these current efforts, DBRS maintains its view that the Company’s revised ratings are supported by its possession of valuable assets in its key infrastructure concession investments, its engineering and project delivery capabilities in its core segments and its low recourse debt levels. Maintenance of these credit strengths will remain critical to SNC’s ratings. DBRS also understands SNC’s liquidity remains satisfactory with cash balance of $789 million as at June 30, 2013.

DBRS expects that the Negative trend will likely be maintained at this stage, so long as the Company remains challenged by legacy problems and contracts. In the longer run, 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.