DBRS Confirms SNC-Lavalin at BBB, Trend Remains Stable

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Debentures rating of SNC-Lavalin Group Inc. (SNC or the Company) at BBB with Stable trend. In confirming the ratings, DBRS recognizes SNC’s progress in completing almost all challenging legacy projects (accounting for only 1.8% of backlog at June 30, 2015) and executing the sale of Altalink L.P. (Altalink) and the Kentz acquisition, which together have materially enhanced SNC’s scale and execution capability in the oil and gas sector without material increase in recourse debt. The current management’s measures to improve the Company’s risk management and governance culture have so far been effective, while SNC’s efforts in standardizing operations and cost reduction have started to improve its profit margins. Notwithstanding SNC’s strengthened market positions, the Stable trend also takes into consideration the uncertainty related to the ongoing charges and investigations over business practices under previous management, which could potentially cause material financial penalties and damages to its ability to compete in certain markets. Given that the outcomes remain highly uncertain and the legal process could be lengthy, DBRS will evaluate any potential impact to SNC as and when the legal process progresses. DBRS will also monitor the impact of the continued weakness in oil and other commodity prices to the Company’s ability to replenish its backlog, working capital requirements and operating profitability in the coming quarters.

DBRS assesses SNC’s financial risk profile primarily based on pro forma full-year 2015 financial metrics and future financial resources available to support its strategy of expanding its core engineering and construction businesses and monetizing its infrastructure concession investments (ICIs) in an orderly way. DBRS recognizes that SNC’s historical financial results since June 2014 have been affected by events that materially distorted financial metrics, including the deconsolidation of Altalink in Q2 2014 and subsequent sale in December 2014, Kentz acquisition in August 2014 and sizable bridge financing in the interim. DBRS expects that SNC’s full-year 2015 financial metrics will support its ratings, with adjusted debt-to-EBITDA of less than 2.0 times and adjusted cash flow-to-debt of approximately 35%. The rating also factors in the expectation that SNC will sustain its financial metrics at similar levels as it finances future growth largely through operating cash flows and proceeds from the disposal of ICIs. SNC has expressed its intention of launching the sale process of its investments in Highway 407 (the most significant asset in its ICI portfolio) by the end of 2015 and has communicated its view that the aggregate fair value of its ICIs is much higher than their net book value of $861 million as at June 30, 2015. DBRS believes that proceeds from the ICI sale could provide resources to facilitate SNC’s growth strategy.

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 methodologies are Rating Companies in the Engineering and Construction Industry (June 4, 2015) and DBRS Criteria: Financial Ratio Definitions and Accounting Adjustments -- Non-Financial Companies (June 10, 2015), which can be found on our website under Methodologies.

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

DBRS’s rating definitions and the terms of use of such ratings are available at www.dbrs.com.