DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Debentures rating of SNC-Lavalin Group Inc. (SNC or the Company) at BB (high) with Stable trends. DBRS Morningstar also confirmed the Recovery Rating of the Senior Debentures at RR4. These actions primarily reflect the favourable earnings and cash flow generating performance in 2021, along with a modest decline in total recourse debt and lease liabilities. These dynamics led to improved credit metrics. DBRS Morningstar also considered the progress made on the reduction of the remaining large-scale lump sum turnkey (LSTK) project backlog, as well as the additional losses associated with these activities in 2021.
The rating confirmations reflect SNC's market position as a top-10 globally recognized firm in the engineering consulting sector, and its large workforce of highly skilled professionals with demonstrated expertise and capacity for handling complex, large-scale service activities across a number of subsectors, including Transportation, Power (including nuclear), Water, and Hazardous Waste, among others. The ratings also incorporate DBRS Morningstar's views on the Company's healthy degree of geographic and customer diversification, with the latter being characterized by long-term engagements with very high-quality clients, the majority of which are from the public sector. The rating confirmations also reflect DBRS Morningstar's views regarding potential additional cost overruns associated with SNC's remaining large-scale LSTK construction projects, a challenging and somewhat volatile global macroeconomic environment, and reputational/litigation risks. On the latter point, DBRS Morningstar notes the progress made by the Company in firming up its internal control systems as well as the existence of an external monitor. Over time, DBRS Morningstar will continue to assess the extent to which this risk has normalized in line with the sector as a whole.
Over the last 12 months, operating performance has generally been favourable, notwithstanding the further disappointments associated with cost overruns at the LSTK projects. Overall, the financial profile has improved, a development consistent with DBRS Morningstar's expectations stated in April 2021.
DBRS Morningstar expects that the amount of business risk will decline over the next 12 months, primarily as certain large-scale LSTK projects are completed. Should this transpire on schedule, it would represent a notable decrease in the overall business risk.
In terms of financial risk, DBRS Morningstar expects that key credit metrics will continue to support the current rating, including a conservative view, which includes some further LSTK project cost overruns in the base case. Ultimately, DBRS Morningstar expects the financial profile to begin to move well into the investment grade range heading into 2023.
Overall, a key issue remains the uncertainty associated with the large, unfinished LSTK projects. Once clear evidence of this risk being substantially reduced to the point of only modest materiality is observed, DBRS Morningstar anticipates that the Company will present a notably different overall risk profile. The clearly robust core engineering services strengths across the firm would then play the dominant role in the underlying credit risk profile, and DBRS Morningstar would likely take an additional step to reflect this in the choice of methodology and overlay risk factoring. This would be a favourable development from a credit perspective and a positive rating action may be considered. While not expected at present, significant deviation from DBRS Morningstar's expectations, especially with respect to the projected financial risk profile of the LSTK construction risks could result in a negative rating action.
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); Rating Companies in the Construction and Property Development Industry (November 19, 2021); DBRS Morningstar Criteria: Guarantees and Other Forms of Support (April 4, 2022); and DBRS Morningstar Criteria: Recovery Ratings for Non-Investment-Grade Corporate Issuers (August 19, 2021), 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).
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@example.com.
The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.
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