DBRS Confirms SNC-Lavalin Group Inc. at BBB with Stable Trends

DBRS Limited (DBRS) confirmed the Issuer Rating and Senior Debentures rating of SNC-Lavalin Group Inc. (SNC or the Company) at BBB with Stable trends. In confirming the ratings, DBRS acknowledges that SNC’s refocus on operational excellence, efforts to further improve cost efficiency and delivery capabilities as well as the Company’s emphasis on more effective risk management, have moderately strengthened its business risk profile. Following the Kentz Corp. Ltd. acquisition in F2014, which added considerable scale and capabilities in the oil and gas (O&G) sector, SNC successfully completed the acquisition of United Kingdom-based WS Atkins plc (Atkins) on July 3, 2017. This acquisition adds significant geographic and sectoral diversification and shifts the Company’s overall business towards the Services segment which DBRS views as beneficial to the overall risk profile. A stronger business risk profile after the acquisition of Atkins is the primary factor supporting the current rating.

As expected, F2016 results were lower given the current challenging environment, offset by SNC’s cost reduction efforts. The Company’s financial profile has deteriorated in the short term, caused by the increase in debt to fund the Atkins acquisition; however, DBRS expects the Company’s financial profile to improve through the generation of stronger sales and combined operating efficiencies over the next five years. The achievable run-rate cost synergies estimated at $120 million are expected to be fully realized by the end of F2018. DBRS expects the Company’s key credit metrics to show gradual improvement to a level commensurate with the current rating by F2018.

The Stable trends reflect DBRS’s expectation that the Company will benefit from the capabilities and service offering that Atkins provides, while SNC continues to improve its operational efficiencies. Notwithstanding this, there are challenges facing SNC that could constrain improvement, at least in the near term. Challenges include (1) weak commodity prices affecting customer activities in its O&G and mining and metallurgy segments, (2) ongoing investigations and charges related to practices of previous management and (3) integration risk of the Atkins business.

RATING DRIVERS
The ratings are unlikely to improve in the near term as the Company’s financial profile recovers following the Atkins acquisition. Conversely, SNC’s ratings could be pressured if charges against the Company under ongoing investigations result in severe financial penalty or reputational loss.

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 methodology is Rating Companies in the Construction and Property Development Industry (December 2016), which can be found on dbrs.com under Methodologies.

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