Morningstar DBRS Confirms WSP Global Inc.'s Issuer Rating at BBB (high), Stable

DBRS Limited (Morningstar DBRS) confirmed WSP Global Inc.'s (WSP or the Company) Issuer Rating and Senior Unsecured Notes rating at BBB (high) with Stable trends.

KEY CREDIT RATING CONSIDERATIONS
WSP's BBB (high) credit ratings reflect the Company's world-class reputation, global operating footprint, and broad sector coverage, which enable it to undertake large-scale and highly complex projects. It also reflects its strong operating performance and free cash flow generating capacity while taking into consideration the integration and financial risks associated with WSP's ongoing acquisition strategy. In the last 12 months (LTM) ended September 30, 2024, the Company achieved 8% net revenue growth compared with LTM September 30, 2023. Largely attributable to the Company's effort on cost efficiencies, over the same period the EBITDA margin grew to 17.5% from 16.8% (as per Morningstar DBRS' calculation). On October 1, 2024, WSP completed the acquisition of Power Engineers, Incorporated (Power) for a purchase price of USD 1.78 billion, funded through the proceeds of a $1.15 billion equity offering, $1 billion in senior unsecured notes, and drawdowns under an incremental credit facility. Established in 1976, Power adds significant scale and diversification to WSP's Power & Energy business, which is expected to double in size.

CREDIT RATING DRIVERS
Morningstar DBRS expects WSP's credit ratings to remain supportive of the credit rating category in the near term. Morningstar DBRS may take a positive credit rating action if the Company demonstrates long-term commitment to a financial risk profile that is even stronger than that of the currently guided range and/or continues to display improvement in its business risk profile through improvement in its market position and diversification while maintaining its strong EBITDA margins. Conversely, Morningstar DBRS may take a negative credit rating action if the Company's leverage exceeds, for a prolonged period of time, its stated target because of merger and acquisition activity and/or deteriorating operating results.

EARNINGS OUTLOOK
Looking ahead, despite some political uncertainty, Morningstar DBRS believes that WSP's operating performance will continue to benefit from its broad geographic coverage as well as its expertise in delivering transport, infrastructure, and sustainability-linked projects, the spending on all of which is expected to continue to remain strong. Supported by the Company's record backlog and robust demand, Morningstar DBRS expects WSP will continue growing, both organically and through acquisitions, and may surpass $13 billion in net revenues by F2025. Morningstar DBRS expects EBITDA margins to modestly improve in the near term because of WSP's ability to pass incremental costs to customers as a result of the nature of its contracts and as the Company's efforts toward internal efficiency bear fruit. In 2024, Morningstar DBRS expects adjusted EBITDA (Morningstar DBRS' calculation) to surpass $2 billion. This would represent a doubling in EBITDA from 2020. During this period, the Company's leverage has prudently remained within its stated guidance, other than temporary deviations to pursue acquisition targets.

FINANCIAL OUTLOOK
Morningstar DBRS expects operating cash flow to increase in line with earnings growth and expects cash flow-to-debt to be above 30% in F2025. The Company's capital expenditure is expected to grow in line with the business' growth. Morningstar DBRS-adjusted debt-to-EBITDA (debt-to-EBITDA) is expected to rise to 2.6 times (x) at F2024, up from 2.3x at F2023, because of increased debt to fund acquisitions. However, Morningstar DBRS expects debt-to-EBITDA to decrease materially in F2025 with a full year of earnings contribution from Power. Despite temporary fluctuations to pursue material acquisitions, Morningstar DBRS expects WSP's financial profile to remain supportive of the credit ratings over the near to medium term.

CREDIT RATING RATIONALE
The credit ratings are underpinned by the Company's strong market position and solid brand strength. WSP has a track record of resilient and steady earnings driven by a prudently managed growth strategy and solid public and private client relationships. The credit ratings are also supported by WSP's strong operating efficiency and free cash flow generating capacity, allowing it the flexibility to continue to invest in growth. The credit ratings also acknowledge the fragmented nature of the global engineering market and exposure to changes in client spending plans. WSP is also susceptible to integration and financial risks associated with large, global acquisitions; the need to manage reputational, geopolitical, and macroeconomic risks; and the potential impact of litigation and/or material penalties.

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 Factors in Credit Ratings (August 13, 2024) at https://dbrs.morningstar.com/research/437781.

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

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

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

(C) Weighting of the BRA and the FRA 
In the analysis of WSP, the BRA carries greater weight than the FRA. 
 
Notes:
All figures are in Canadian dollars unless otherwise noted.

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Companies in the Services Industry (September 13, 2024), https://dbrs.morningstar.com/research/439363

Morningstar DBRS credit ratings may use of one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024; https://dbrs.morningstar.com/research/431186) which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodology has also been applied:
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781

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/431153.

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@morningstar.com.

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.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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