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. This action reflects a year of transformational changes with the completion of the WS Atkins plc (Atkins) acquisition and strong operating performance. In confirming the ratings, DBRS anticipates continued improvement in operating results and a gradual recovery in the Company’s key credit metrics, which were weakened due to the debt incurred to fund the Atkins acquisition.

DBRS notes that the addition of Atkins strengthens the competitive position of the Company, specifically in the Power and Infrastructure segments. Atkins adds significant geographic and sectoral diversification and shifts the Company’s overall business toward the Services segment, which DBRS views as beneficial to the overall risk profile. DBRS expects SNC’s continued focus on operational excellence, efforts to further improve cost efficiency and delivery capabilities as well as the Company’s emphasis on more effective risk management to continue and be expanded to the Atkins business. Following the acquisition, DBRS does not anticipate any material changes in the Company’s business risk profile in the near term.

The Company achieved stronger-than-expected operating results in F2017, primarily due to the addition of the incremental revenue and EBITDA from the Atkins business, as well as the increased margin contribution from the Infrastructure and the Oil and Gas (O&G) divisions. DBRS expects the estimated $120 million in cost synergies with Atkins will be fully realized by F2018. Furthermore, DBRS expects the Company’s financial profile to continue to improve through the generation of stronger sales and combined operating efficiencies over the near term. Through a focus on debt repayment and organic growth within its key segments, DBRS expects SNC’s key financial metrics to improve to a level commensurate with pre-acquisition levels by F2019.

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) slow recovery in 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 material 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, 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.

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 info@dbrs.com.