Morningstar DBRS Changes Trends on SNC-Lavalin Group Inc. (Operating as AtkinsRéalis) to Positive from Stable, Confirms BB (high) Credit Ratings

DBRS Limited (Morningstar DBRS) changed the trends on SNC-Lavalin Group Inc. (operating as AtkinsRéalis; the Company) to Positive from Stable and confirmed the Issuer Rating and the Senior Debentures credit rating, each at BB (high), and the recovery rating at RR4.

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmations reflect AtkinsRéalis’ position as a top-tier international design firm, its capacity for handling large-scale and complex service activities across a variety of subsectors, its geographic diversification, and its long-term relationships with high-quality clientele, largely from the public sector. The trend change is partially driven by the progress made on the remaining lump-sum turnkey (LSTK) backlog, which Morningstar DBRS anticipates will be significantly complete by the end of 2024. Upon delivery of these projects, this would signify a milestone in the Company's transformational journey that began in 2019, resulting in a less volatile financial profile underpinned by the strength and resilience of its engineering services business.

CREDIT RATING DRIVERS
The Company's overall risk profile continues to improve as it delivers on its strategic action plan to end LSTK risk and focus on the more robust engineering services business. A positive credit rating action can occur if the Company continues to demonstrate immaterial earnings volatility from the remaining LSTK projects such that the Company is able to maintain a lease-adjusted debt-to-EBITDA ratio below 3.0 times (x). While not currently anticipated, prolonged material volatility, with respect to further downside risk related to LSTK construction could result in a removal of the Positive trend.

EARNINGS OUTLOOK
Because of AtkinsRéalis' geographic and sector diversification as well as its large exposure to the public sector, Morningstar DBRS expects the Company to remain relatively resilient to any current macroeconomic headwinds. Further, the Company is expected to benefit from its expertise in transport, water, nuclear, and sustainability-linked projects, spending on all of which is expected to remain strong across the Company's geographic platform.

Morningstar DBRS forecasts revenue to grow to above $9 billion in F2024. Margin improvement is forecast to continue, supported by the delivery of the remaining LSTK projects and the proposed sale of the Linxon business. Going forward, Morningstar DBRS anticipates the Company will have significantly more financial flexibility after 2024 because of the cash generative ability of the Engineering Services and Nuclear segments and the winding down of remaining construction risk. Therefore, Morningstar DBRS expects the Company to be more opportunistic with regards to acquisition activity and share buybacks going forward. Operating costs are expected to remain relatively steady, and Morningstar DBRS expects the base-case forecast earnings to improve modestly in 2024.

FINANCIAL OUTLOOK
Morningstar DBRS expects AtkinsRéalis' financial profile to remain above the current credit rating category level. Morningstar DBRS forecasts (1) improvement in the debt-to-EBITDA ratio (Morningstar DBRS calculated) to around 2.0x and (2) a materially improved cash flow-to-debt ratio of above 30% largely because of the Company's efforts toward debt reduction as well as the cash generative capabilities of the go-forward business. Given the high level of opportunity within the nuclear space, capital expenditures are expected to remain elevated in F2024 and F2025 as the Company invests in nuclear technologies.

CREDIT RATING RATIONALE
AtkinsRéalis' 2023 operating performance vastly exceeded Morningstar DBRS’ expectations. The Company achieved significant revenue and EBITDA growth a year ahead of Morningstar DBRS’ base-case projected growth. This growth was driven by the Engineering Services, Nuclear, and Capital segments, with lower contribution and lower losses from the LSTK and Linxon divisions. Overall, credit metrics strengthened significantly in F2023 with the debt-to-EBITDA ratio at 2.5x, significantly improving from 4.5x in F2022, and the cash flow-to-debt ratio improving to 14.0%, up from 0.8% in F2022. Morningstar DBRS anticipates financial metrics will continue to strengthen in 2024 and be firmly within investment-grade territory as the Company focuses on delivering long-term value to its shareholders, supported by its less volatile and highly cash-generative business segments.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024), https://dbrs.morningstar.com/research/427030.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)

(A) Weighting of BRA Factors
In the analysis of AtkinsRéalis, the relative weighting of the BRA factors was approximately equal.

(B) Weighting of FRA Factors
In the analysis of AtkinsRéalis, the relative weighting of the FRA factors was approximately equal.

(C) Weighting of the BRA and the FRA
In the analysis of AtkinsRéalis, the BRA and the FRA carry approximately equal weight.

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

Morningstar DBRS applied the following principal methodologies:
-- Global Methodology for Rating Companies in the Services Industry (February 20, 2024), https://dbrs.morningstar.com/research/428396.
--- DBRS Morningstar Global Criteria: Recovery Ratings for Non-Investment-Grade Corporate Issuers (August 30, 2023), https://dbrs.morningstar.com/research/420063.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/397223.

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 credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

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

Morningstar DBRS 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].

Information regarding Morningstar DBRS ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at [email protected].

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