DBRS Morningstar Confirms SNC-Lavalin’s Issuer Rating and Senior Debentures Rating, Removes Ratings from Under Review with Negative Implications

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Debentures rating of SNC-Lavalin Group Inc. (SNC or the Company) at BB (high) with Stable trends. At the same time, DBRS Morningstar confirmed the Recovery Rating of the Senior Debentures at RR4. DBRS Morningstar removed these ratings from Under Review with Negative Implications, where they were placed on February 10, 2021, following provisions taken for lump sum turnkey litigation matters and commercial claims as well as SNC’s announced sale of its Oil and Gas (O&G) business which is set to close in Q2 2021. Although the sale reduces SNC’s sectoral and customer diversification, the O&G division has suppressed the Company’s earnings since 2018, and unstable commodity prices have resulted in recent volatility as customers adjust their operations. The sale allows the Company a relatively clean exit from its active contracts and the ongoing warranty obligations of former contracts. The sale is also an important milestone in SNC achieving its strategic initiative of focusing on its core Engineering Services business, which helps to avoid any distractions from its legacy O&G business.

Operating performance worsened in 2020 as full-year performance was marked by a significant amount of restructuring, impairment costs, and losses on discontinued operations while SNC moved toward aligning operations with its business strategy. Furthermore, the impact of the Coronavirus Disease (COVID-19) pandemic on operations, legacy lump sum turnkey (LSTK) litigation matters, and commercial claims compounded the impact on earnings and cash flow. Although SNC's operating performance and financial metrics were weaker in F2020 compared with F2019, DBRS Morningstar largely factored this weakening of metrics into the rationale for the downgrade in Q4 2020. DBRS Morningstar expects gradual improvement in financial metrics to those consistent with the rating by 2022, while noting that the impact of the coronavirus pandemic on the Company's operating performance remains highly uncertain and rapidly evolving. DBRS Morningstar will continue to closely monitor the situation and take necessary action in the event of a material development. The rating confirmations are further supported by SNC’s comfortable liquidity position with cash balances above $900 million and a largely unused revolving credit facility with availability of $2.4 billion as at December 31, 2020, as well as the Company’s portfolio of capital investments with an estimated market value of more than $2 billion.

DBRS Morningstar integrated its methodology “Rating Companies in the Services Industry” (the Services Methodology) into the Company rating, along with the methodology “Rating Companies in the Construction and Property Development Industry,” which better aligns SNC’s risk profile with its strategic direction to exit LSTK construction contracts. DBRS Morningstar notes the modestly improved business risk assessment of the Company with this incorporation. Pillars of SNC's Business Risk Assessment strength under the Services Methodology include the Company’s reputation for engineering/project management excellence, notably in the transportation, civil infrastructure, and nuclear sectors, all with attractive long-term demand fundamentals; SNC’s geographic diversification (almost 80% of activities are undertaken in Organization for Economic Cooperation and Development countries); and diversified public and private clients, many characterized by long-term relationships with repeat customers within SNC’s core Engineering Services business.

Going forward, DBRS Morningstar expects SNC to demonstrate prudent financial management and improve adjusted debt-to-EBITDA ratio to below 4.0 times in the near term through recovery of earnings and/or debt reduction. Additional project and operational challenges that prevent earnings recovery and lead to further deterioration in credit metrics (including those related to the coronavirus pandemic) could trigger a negative rating action. DBRS Morningstar notes that progress made toward completion of the legacy lump-sum contract backlog without material project losses as well as persistent improvement in credit metrics would be the key drivers for placing the ratings on a positive trend.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodologies are Rating Companies in the Construction and Property Development Industry (November 20, 2020, https://www.dbrsmorningstar.com/research/370316), Rating Companies in the Services Industry (January 21, 2021, https://www.dbrsmorningstar.com/research/372947), DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 14, 2021, https://www.dbrsmorningstar.com/research/372344), and DBRS Morningstar Criteria: Recovery Ratings for Non-Investment-Grade Corporate Issuers (August 24, 2020, https://www.dbrsmorningstar.com/research/366063), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021, https://www.dbrsmorningstar.com/research/373262).

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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 [email protected].

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

DBRS Morningstar will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at [email protected].

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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