DBRS Confirms SNC-Lavalin’s BBB Ratings and Stable Trend

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 a Stable trend. In confirming the ratings, DBRS acknowledges that SNC’s refocusing on engineering and construction (E&C), its efforts to improve cost efficiency and delivery capabilities and its emphasis on risk management culture have gradually strengthened its business risk profile. With improved operating results and steady recourse debt level, financial metrics in the last 12 months (LTM) ended June 30, 2016, have reached levels considered comfortable for the ratings. Notwithstanding this, the Stable trend reflects that the prevailing challenges facing SNC could constrain further improvement, at least in the near term. Challenges include (1) weak commodity prices affecting customer activities in its oil and gas (O&G) and mining and metallurgy (M&M) segments and (2) ongoing investigations and charges related to practices of previous management.

SNC reported a 9% year-over-year (YOY) revenue decrease in H1 2016, largely because of the completion of large projects in Infrastructure and Construction, weak activities in M&M, lower volume of transmission work in its Power segment in Western Canada and non-renewal of unprofitable operation and maintenance (O&M) contracts. O&G, the only E&C segment reporting revenue increase, was supported by ongoing projects and the O&M nature of work performed, despite lower production activities. SNC reacted promptly with its “Step Change” program, focusing on cost reduction and operating efficiency gain, which contributed to 11% and 14% YOY reductions in direct costs and selling, general and administration expenses, respectively. This, and the absence of material project-related issues, resulted in a 30% YOY increase in EBITDA despite weaker revenue. DBRS believes such efficiency gain and discipline in project risk management, if sustained, could make SNC’s profitability and cash flow less susceptible to business down cycles in key segments.

SNC’s recourse debt level has been steady at approximately $350 million since 2009, apart from the temporary financing of its acquisition of Kentz Corporation Limited (Kentz), pending proceeds from the sale of Altalink L.P. With improved operating results, the Company’s financial metrics have strengthened, with adjusted cash flow-to-debt of 48% and debt-to-EBITDA of 1.3 times for LTM June 30, 2016. As SNC explores acquisition opportunities for future growth, DBRS expects the Company to fund at least part of the related spending with debt, given the current low debt level and low borrowing cost.

RATING DRIVERS
DBRS could consider positive rating action if SNC maintains its business risk profile and financial metrics at similar levels on a sustained basis. Conversely, SNC’s ratings could be pressured in the event of a debt-funded acquisition that materially weakens financial metrics or charges against the Company under ongoing investigations result in severe financial penalty or reputational loss.

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 (April 2016) and DBRS Criteria: Financial Ratio Definitions and Accounting Adjustments – Non-Financial Companies (April 2016), which can be found on our website under Methodologies.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com