DBRS Downgrades the Issuer Rating and Senior Debentures Rating of SNC-Lavalin and Changes Trend to Negative from Stable

DBRS Limited (DBRS) downgraded the Issuer Rating and Senior Debentures rating of SNC-Lavalin Group Inc. (SNC or the Company) to BBB (low) from BBB and changed the trend to Negative from Stable. The downgrade reflects considerably weaker-than-anticipated Q2 2019 results, which DBRS estimates will reduce 2019 forecast earnings, resulting in a slower recovery of the Company’s key financial metrics. DBRS expects the Company’s financial flexibility to improve as $3.0 billion in proceeds (expected by year end) from the sale of 60% of its ownership position in 407 International Inc. (rated “A” with a Stable trend by DBRS) is applied toward debt repayment; however, DBRS projects SNC’s 2019 (full-year) debt-to-EBITDA ratio to be considerably weaker than previously anticipated given continued execution challenges faced in the engineering, procurement and construction (EPC) sector.

On July 22, 2019, SNC announced a reorganization of its business, including exiting lump-sum turnkey contracting (i.e., no new bidding activity, with existing projects remaining subject to completion) and a potential divestiture of its Resources business as a result of volatile earnings results caused by several challenged projects within SNC’s Infrastructure and Resources segments. These challenges, which continued into Q2 2019, have demanded a strategic overhaul of the business in order to separate the strengths within the Company’s service offerings (Engineering & Design, Operations & Maintenance and Capital) from construction risk. If SNC’s new strategy is executed as proposed, the move away from the volatile fixed-price EPC sector may have potential positive implications for the Company’s business risk assessment (BRA), notwithstanding the smaller scale of the remaining business. However, the Company will need to successfully execute and deliver a challenging EPC Infrastructure and Resources legacy backlog of $3.2 billion. Accordingly, DBRS believes there remains heightened business risk surrounding the Company and uncertainty as to whether the current strategic plan will be executed, as proposed, without major financial volatility.

DBRS will continue to review the Company’s strategic plan as information becomes available in order to determine the impact on SNC’s BRA — notably, changes in risk management and reduced market position and diversification, subject to the Company’s decision to divest or transform its Resources business. To return the trends to Stable, SNC would need to display growth and progress in its Engineering Services business, along with recovering earnings toward a level supportive of the Issuer Rating. DBRS may take an additional negative rating action if additional project challenges continue to adversely affect SNC’s earnings and hinder meaningful debt repayment such that the Company’s debt-to-EBITDA ratio (as calculated by DBRS) remains above 3.0 times on a sustained basis (the Company’s EBITDA through the first half of 2019 is expected to be negative).

Notes:
All figures are in Canadian dollars unless otherwise noted.

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

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 under Related Documents or by contacting us at info@dbrs.com.

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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