DBRS Places SNC-Lavalin BBB Ratings Under Review with Negative Implications Following Announcement to Acquire Kentz Corporation Limited

DBRS has today placed SNC-Lavalin Group Inc.’s (SNC or the Company) BBB Issuer Rating and Senior Debentures rating Under Review with Negative Implications following the Company’s announcement that it has agreed to acquire all equity interests of U.K.-based Kentz Corporation Limited (Kentz). The proposed acquisition is planned to be executed through scheme of arrangement, which will be subject to approval by Kentz’s shareholders, regulatory approval and the court’s sanction. Kentz is a global oil and gas services company with 14,500 employees operating in 36 countries, with a total revenue of USD 1.66 billion in 2013. DBRS understands the cash consideration of CAD 2.75 billion (including purchase price, assumption of debt and transaction costs) will be financed through a bridge loan of CAD 2.55 billion and a term loan of CAD 200 million. The bridge loan will be repaid upon receipt of sale proceeds following regulatory approval of the Company’s sale of AltaLink, L.P. (AltaLink), previously announced on May 1, 2014.

In placing SNC’s ratings Under Review with Negative Implications, DBRS recognizes the near-term challenges and uncertainties facing the Company that could potentially pressure its ratings. In the next six to nine months, assuming that the acquisition proceeds as planned, SNC will need to manage its legacy business issues while simultaneously executing business integration with Kentz. Integration issues include possible attrition of Kentz’s key managers and engineering professionals and loss of its major customers in the oil and gas segment. These issues could potentially reduce the expected benefits and cost synergy of the acquisition. While DBRS understands that SNC’s progress in completing its legacy and low-profit projects has been on track toward its target of Q4 2014 to Q1 2015, these integration issues could have the potential of distracting management from focusing its efforts toward achieving the target. Finally, the Company will face a short period of increased leverage until the bridge loan is repaid with the sale proceeds from AltaLink, and any material delay in the financial closing of the sale could lengthen the period of elevated leverage and interest expenses.

Upon completion of integrating Kentz’s business into SNC’s, DBRS expects the acquisition could moderately benefit SNC’s overall business risk profile in the longer term. These benefits include (1) increased penetration, delivery capability and revenue contribution of the Oil and Gas and Petrochemical segment; (2) an increased proportion of cost-reimbursable contracts and reduced exposure to higher-risk fixed-price contracts; (3) a strengthened SNC presence in the United States, the Middle East, Australia and Asia; and (4) increased scale and backlog. In addition, DBRS recognizes that upon conclusion of the AltaLink sale and application of sale proceeds to repay the bridge loan, the acquisition should not result in a material increase in SNC’s debt level and weaker financial metrics.

DBRS expects that SNC’s ratings will remain under review until more progress is made toward financial closure of the AltaLink sale, business integration with Kentz and resolution of the legacy underperforming projects. SNC’s ratings could be downgraded, most likely by one notch, in the event that (1) there is indication of material delay in regulatory approval or outright disapproval of the AltaLink sale, which could prolong the period of increased leverage and increase the refinancing risk of the bridge loan; (2) problems occur in Kentz’s operations during business integration, resulting in material customer attrition, loss of key personnel or project execution problems at Kentz; or (3) significant delays in resolution of legacy projects or the emergence of new problem projects causing material loss in SNC’s core engineering and construction business. Conversely, DBRS could confirm SNC’s rating when the Company makes material progress toward reducing the aforementioned uncertainties. This could happen after the successful financial closure of the AltaLink sale and repayment of the bridge loan, smooth business integration with Kentz, with the expected benefits beginning to materialize, and substantial completion of all legacy projects and improved profitability in SNC’s existing business.

Notes:
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.