DBRS Confirms SNC-Lavalin Group Inc. at BBB with a 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 after the Company completed the acquisition of United Kingdom-based WS Atkins (Atkins), a design engineering and project management consultancy. The confirmation is primarily supported by SNC’s stronger business risk profile after the acquisition of Atkins. With this rating action, the Company’s ratings are removed from Under Review with Developing Implications where they were placed on April 21, 2017.

With 12-month revenues of GBP 2 billion ending March 31, 2017, and approximately 18,000 employees worldwide, Atkins is the 11th largest global design firm and the United Kingdom’s largest engineering consultancy. For context, in 2016, SNC’s revenues were CAD 8.47 billion (approximately GBP 5.1 billion), and it employs almost 35,000 employees worldwide.

Overall, DBRS believes that Atkins’ business lines complement SNC’s operations well, as they provide not only scale but also geographic and sectoral diversification benefits. The acquisition of Atkins has meaningfully strengthened SNC’s customer diversification and international reach. While SNC generated 44% of its revenues in 2016 from the oil & gas sector, Atkins generates only about 12% of revenues from energy, with the remainder sourced from infrastructure. Over 40% of SNC’s 2016 revenues were generated in Canada and over half from North America, whereas almost half of Atkins’ business is sourced from Europe. Atkins’ business from master service agreements for consulting and advisory services and its fixed-fee advisory and design operations represent lower-risk earnings streams. The acquisition of Atkins is expected to positively diversify SNC’s business risk profile, which derives over half of its revenues from fixed-price contracts (55% in 2016). DBRS believes that the decision to retain Atkins’ Executive Director Heath Drewett to lead the Atkins business in a manner consistent with Atkins’ existing succession plans will mitigate the risk of serious integration problems. Furthermore, integration risk is also reduced by the relatively small amount of overlap across the companies’ business lines.

SNC funded the approximately CAD 3.6 billion acquisition cost via a mix of debt and equity. SNC’s largest shareholder, Caisse de dépôt et placement du Québec (CDPQ; rated AAA by DBRS) provided a CAD 1.5 billion loan to SNC subsidiary SNC-Lavalin Highway Holdings, which holds SNC’s 16.77% interest in Highway 407 ETR. This loan is secured by the full value of SNC-Lavalin Highway Holdings’ shares and the cash flows generated from such shares. The loan is structured to be of a non-recourse nature against SNC, although it reduces SNC’s access to dividends from Highway 407 ETR. CDPQ also provided CAD 400 million in equity financing via a private placement. SNC borrowed the remainder by way of a new GBP 300 million unsecured term loan as well as approximately GBP 200 million drawn under the Company’s existing CAD 2.75 billion credit facility. SNC financed the remaining funds with net proceeds from the Corporation’s previously announced CAD 880 million public equity offering.

DBRS notes that SNC’s overall credit profile is acceptable for the current rating because the stronger business profile is able to offset the deterioration in its financial risk profile caused by the increase in debt to fund the acquisition. The acquisition has weakened key metrics to the lower end of the investment-grade range (please refer to the DBRS methodology “Rating Companies in the Construction and Property Development Industry,” December 2016, which is available on the DBRS website); however, SNC’s business risk profile should improve modestly from the addition of Atkins’ complementary businesses. The Company’s balance sheet is expected to show improvements through the generation of stronger sales and improvements in combined operating efficiencies over the next five years. The achievable annual run-rate cost synergies are estimated at $120 million, to be fully realized as of the end of fiscal 2018. DBRS expects the Company’s key credit metrics to show gradual improvement to a level acceptable to the current rating by fiscal 2018.

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 principal methodology is Rating Companies in the Construction and Property Development Industry (December 2016), which can be found on dbrs.com under Methodologies.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.