DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Debentures rating of SNC-Lavalin Group Inc. (SNC or the Company) at BB (high). DBRS Morningstar also confirmed the Recovery Rating of the Senior Debentures at RR4. All trends remain Stable, reflecting improvement in SNC’s business risk profile through significant progress made in the reduction of its lump-sum turnkey (LSTK) project backlog. Despite continual losses associated with these activities in 2022, SNC’s rating continues to be supported by its robust engineering services business, which DBRS Morningstar deems to be of investment-grade quality due to its capacity for handling large-scale and complex service activities across a variety of subsectors, its geographic diversification, and long-term relationships with high- quality clientele, largely from the public sector.
The Company delivered moderate revenue growth of about 3% within its Professional Services & Project Management business in F2022. Revenue growth was driven by SNC’s Engineering Services and Operations & Maintenance businesses. EBITDA (DBRS Morningstar calculated) reduced to $425 million in F2022 from $502 million in F2021, as affected by lower earnings contributions from Engineering Services and SNC’s Capital business as well as a loss from Linxon, which specializes in engineering, procurement, and construction of power substations. Overall, credit metrics weakened in 2022 as a result of weakened EBITDA, cash flow, and an increase in total recourse debt as the Company worked towards bringing both the Ottawa (Trillium) and Toronto (Eglinton) LSTK projects towards physical completion, which was achieved in 2022. Despite metrics weakening in 2022 beyond what was previously forecast, the losses realized on the Company’s LSTK projects are within SNC’s publicly stated $300 million risk envelope. DBRS Morningstar expects SNC’s financial risk metrics, which are currently weak for the rating, to be within the current ratings category by fiscal 2023 and ultimately reach investment grade by 2024.
Despite a challenging macroeconomic environment, DBRS Morningstar expects that SNC’s core business will remain resilient to any global activity slowdown due to its expertise in sustainable infrastructure and energy solutions as well as its large exposure to the public sector, where spending is forecast to remain strong. DBRS Morningstar anticipates that SNC will materially complete its LSTK projects by 2024, upon which the Company’s overall risk profile will be markedly different. At that time, the more robust engineering services business will underpin SNC’s credit risk profile without the overhang of financial volatility from LSTK construction risk. This would be a favourable development from a credit perspective. Once the Company demonstrates the ability to achieve, as well as the commitment to maintain investment-grade financial metrics, a positive rating action will be considered. While not currently anticipated, prolonged financial volatility, especially with respect to further material downside risk related to LSTK construction, could result in a negative rating action.
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.
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/396929 (May 17, 2022).
All figures are in Canadian dollars unless otherwise noted.
DBRS Morningstar applied the following principal methodologies:
-- Global Methodology for Rating Companies in the Services Industry (February 14, 2023; https://www.dbrsmorningstar.com/research/409773)
-- Global Methodology for Rating Companies in the Construction and Property Development Industry (November 24, 2022; https://www.dbrsmorningstar.com/research/405710)
-- DBRS Morningstar Global Criteria: Guarantees and Other Forms of Support (March 28, 2023; https://www.dbrsmorningstar.com/research/411694)
-- DBRS Morningstar Global Criteria: Recovery Ratings for Non-Investment-Grade Corporate Issuers (September 1, 2022; https://www.dbrsmorningstar.com/research/402218)
The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.
A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate- finance-rating-methodologies-when-analyzing-corporate-finance-transactions.
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