DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Unsecured Notes ratings of WSP Global Inc. (WSP or the Company) at BBB (high) with Stable trends. These actions reflect the strong operating performance over the last 12 months that was modestly ahead of DBRS Morningstar's expectations. The ratings continue to reflect the Company's broad set of strong structural business strengths, including its global reach, reputation for excellence, leadership position in earth and environmental service activities, and its long-term relationships with an impressively broad, deep, and high-quality set of clients. The ratings also incorporate the integration and financial risks associated with WSP's consequential acquisition strategy.
Net revenues grew by 14.7% in 2021, primarily because of the acquisition of Golder Associates (Golder), an Ontario-based global earth, environment, and energy consulting and design services provider that was acquired in April 2021, and also because of contributions from organic growth. EBITDA rose by 23% to $1.27 billion (DBRS Morningstar calculation), supported by EBITDA margin improvement to 16.2% from 15.0%. The strong earnings performance translated into strong internal cash generation. However, DBRS Morningstar had expected the extremely strong financial risk profile from 2020 to normalize in 2021, and this is what transpired. Despite the significant equity component, the large debt financing required for the Golder acquisition led to a notable weakening of financial metrics compared to 2020, although the 2021 financial metrics remained fully supportive of the current rating.
As a result of strategic acquisitions, DBRS Morningstar expects the business risk profile to improve modestly over the next 12 months from the currently very strong investment-grade level. DBRS Morningstar is expecting meaningful debt-financed acquisitions over the next 12 months, but given the Company’s substantial cash-generative power, DBRS Morningstar is still anticipating that the financial profile may strengthen over the course of the year ahead. However, it would not be a surprise if the Company were to undertake acquisitions that exceeded DBRS Morningstar’s base-case expectations and thus pressured key metrics temporarily.
Overall, DBRS Morningstar's view is that the Company is well supported from a business risk and a financial risk perspective at the current rating level. If the Company were to substantially exceed DBRS Morningstar's expectations in terms of acquisition activity, leading to a prolonged period of leverage above the Company's publicly stated target range, DBRS Morningstar could consider a negative rating action. A demonstrated long-term commitment to a financial risk profile even stronger than that of the currently guided range, and/or significant improvements in the business risk profile, on a scale likely achievable only via major acquisitions, could lead to a positive rating action. DBRS Morningstar is currently contemplating neither in the near to medium term.
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.
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies are Rating Companies in the Services Industry (January 28, 2022; https://www.dbrsmorningstar.com/research/391428) and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (April 4, 2022; https://www.dbrsmorningstar.com/research/394683) 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).
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The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar did have access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
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