DBRS Removes Under Review with Negative Implications Status and Confirms Ratings of SNC-Lavalin Group Inc. at BBB, Stable Trends

DBRS Limited (DBRS) removed the Issuer Rating and Senior Debentures rating of SNC-Lavalin Group Inc. (SNC or the Company) from Under Review with Negative Implications and confirmed both ratings at BBB. The trends are Stable. DBRS’s confirmation follows SNC’s announced disposal of 10% of its investment in Highway 407 ETR that is expected to close in June 2019. The confirmation reflects that, if the sale closes as expected, funds will be used towards the repayment of $600 million of the Caisse de dépôt et placement du Québec loan as well as a minimum of $1.2 billion of recourse debt, resulting in credit metrics exceeding those required for the current ratings and will not be used towards material shareholder returns to the extent they would negatively affect credit metrics. The confirmation is also reinforced by the Company’s response to and remediation of project control issues identified as a result of the considerable project loss in the Company’s Mining and Metallurgy (M&M) division of approximately $350 million in F2018, absent any expected recoveries. The announced changes to the Company’s risk framework and project governance that include the creation of a function dedicated to governance led by a newly appointed executive vice president, as well as updates to its project approval and claims management processes should address project control issues and allow the Company to materially reduce the likelihood of these events occurring in the future. In Q1 2019, SNC announced they will cease bidding on fixed-price engineering, procurement and construction (EPC) contracts in its M&M division. DBRS expects that SNC will continue to evaluate its involvement in higher risk pursuits across all sectors, refocusing on SNC’s core competencies and a de-risking of its business strategy.

Financially, operating results in F2018 were challenged by several factors that DBRS considers to be non-recurring, including the M&M project loss, a 2012 class action lawsuit settlement, gains/losses on disposals and goodwill impairment charges. Further, the Company’s recourse debt increased to $2.3 billion in F2018, from $1.3 billion in F2017, and DBRS calculated credit metrics fell to the lower-end of investment grade. DBRS expects the volatility in operating results will be temporary and views the Company’s planned cost reduction initiatives, including an immediate decrease in dividends, as prudent financial management given near-term uncertainty. As announced, the Company will use the Highway 407 ETR sale proceeds toward significant debt repayment that is expected to improve debt-to-EBITDA to BBB (high), exceeding those required for the rating.

DBRS continues to believe the strategic shift toward professional services and away from EPC projects, as a result of the WS Atkins acquisition, has strengthened SNC’s business risk profile. DBRS also acknowledges that the political tensions between Canada and Saudi Arabia could result in reduced work from these regions, however, DBRS believes SNC’s position as a global engineering and construction firm, as well as its market position (notably increased by the WS Atkins acquisition), will allow SNC to navigate through regional challenges and adjust business pursuits accordingly, particularly in SNC’s targeted growth markets. The Stable trends reflect DBRS’s expectation that SNC’s efforts will be focused heavily on its core competencies, project delivery and cost efficiency. A deviation from this approach or further lapses in project controls would likely have negative rating implications. DBRS does not anticipate any positive rating actions in the near to medium term. DBRS notes the decision not to invite SNC to take part in a remediation agreement was upheld by the Federal Court of Canada on March 8, 2019. As a result, a trial of SNC’s ongoing corruption and fraud charges stemming from legacy contracts may commence in 2019. While potentially causing negative rating pressure, DBRS continues to believe no rating action is warranted at this time because the legal process could be lengthy and the outcome remains highly uncertain. DBRS will evaluate any potential impact to SNC as and when the legal process progresses and/or concludes.

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 methodologies are Rating Companies in the Construction and Property Development Industry (December 2018), DBRS Criteria: Guarantees and Other Forms of Support (January 2019) and DBRS Criteria: Rating Corporate Holding Companies and Their Subsidiaries (November 2018), which can be found on dbrs.com under Methodologies & Criteria.

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

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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