Business

SNC-Lavalin receives credit rating downgrade from Standard & Poor's

Debt rating agency Standard & Poor's downgraded the SNC-Lavalin Tuesday, citing diplomatic tensions and criminal charges against the beleaguered engineering giant as among the financial headwinds buffeting a firm now swept up in a political firestorm.

Debt rating agency cited criminal charges, diplomatic tensions facing beleaguered engineering giant

The SNC-Lavalin headquarters is seen in Montreal on Tuesday, February 12, 2019. Debt rating agency Standard & Poor's downgraded the company Tuesday, citing diplomatic tensions and criminal charges. (Paul Chiasson/Canadian Press)

The woes won't stop piling up for SNC-Lavalin Group Inc.

Debt rating agency Standard & Poor's downgraded the company Tuesday, citing diplomatic tensions and criminal charges against the beleaguered engineering giant as among the financial headwinds buffeting a firm now swept up in a political firestorm.

A pair of slashed profit forecasts from SNC-Lavalin in the past three weeks — which first halved the per-share earnings target and then cut it again by more than 40 per cent — will make for a higher debt ratio, the agency said, prompting the downgrade to BBB- from BBB.

An ongoing feud between Canada and Saudi Arabia, where the company has 9,000 employees, is jeopardizing future contracts in a volatile oil and gas industry, the agency suggested.

"In our view, tension between the two countries has weakened SNC's competitive position in the Middle East, and will likely affect a meaningful share of the company's future growth."

The company generates between 10 per cent and 15 per cent of its revenues in the region, the agency estimates.

Standard & Poor's also highlighted the prospect of a ban of up to 10 years on contracts with the federal government in Canada.

The ban is one possible outcome that could flow from a conviction on fraud and corruption charges stemming from alleged dealings with the Libyan regime under Moammar Gadhafi between 2001 and 2011. The company has pleaded not guilty.

The pie's getting awfully small to survive.  They're going through very, very tough times.- Ian Lee, associate professor of business, Carleton University

In 2013, SNC-Lavalin was debarred from bidding on any construction project backed by the World Bank for up to 10 years, constraining its options.

"The pie's getting awfully small to survive," said Ian Lee, an associate professor at Carleton University's business school. "They're going through very, very tough times."

Adding to the "modest degree of uncertainty in the company's earnings" are problems at a mining project and the risk of a global economic slowdown, the agency said.

The Montreal-based company has halted all bidding on future mining projects following a contract dispute with Chile's state-owned copper mining company Codelco. Now entering arbitration, the tiff could yield a $350-million loss for SNC-Lavalin's mining and metallurgy business in the fourth quarter of 2018.

Ethics investigation

The downgrade came after the federal ethics commissioner launched an investigation into allegations that the Prime Minister's Office put pressure on former attorney general Jody Wilson-Raybould to help the company avoid a criminal prosecution.

Prime Minister Justin Trudeau has denied directing Wilson-Raybould, who resigned from cabinet Tuesday, on the matter.

Analyst Yuri Lynk of Canaccord Genuity said the reputational damage of a looming corruption case could hurt the company more than a decade-long ban on federal contract bidding.

"In my mind, it's worse just to have this hanging over the company's head for another several years. It hurts their reputation," he said. "Their competitors would always be reminding clients that you're dealing with someone with outstanding charges against it in its own country."

Possible remediation agreement

Lynk said a remediation agreement would likely lead to a major stock bump, sorely desired after shares dove to a 10-year low of $34 on Monday.

It might also lessen the appeal for SNC to sell part of its 16.77 per cent stake in Ontario's 407 ETR highway. The company has been mulling a partial sale for at least six months, which would hand it a slice of the $2.2 billion some analysts say the stake is worth.

"They've got a lot on their plate, but I would say trying to get the remediation agreement settled would be at the top of their to-do list," Lynk said.

The upside from signing a remediation agreement far outweighs any potential fine that SNC would have had to pay.- Mona Nazir, Laurentian Bank Securities analyst

Nearly one-third of SNC's revenue stems from work in Canada, though much of it through contracts that are not with the federal government, said Laurentian Bank Securities analyst Mona Nazir.

A remediation agreement could stick SNC with a potential fine of between $200 million and $500 million or more, analysts say.

"The upside from signing a remediation agreement far outweighs any potential fine that SNC would have had to pay," Nazir said.

Analyst Derek Spronck of RBC Dominion Securities noted that the rating downgrade will result in pricing increases on the company's $500-million term loan.

Further clouding the legal and fiscal horizon are court documents that show Quebec prosecutors are working with the RCMP on the possibility of new criminal charges against SNC-Lavalin tied to a contract to refurbish Montreal's Jacques Cartier Bridge.

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