BUSINESS

DBRS downgrades SNC-Lavalin ratings to BBB after lower earnings guidance

10/17/2013 01:11 EDT | Updated 12/17/2013 05:12 EST
MONTREAL - DBRS downgraded SNC-Lavalin's issuer and senior debenture ratings Thursday after the Canadian engineering giant substantially lowered its earnings guidance for the year.

SNC-Lavalin (TSX:SNC) said its outlook has worsened due a number of money-losing legacy contracts, a charge to restructure European operations and weak mining market conditions.

It forecast that net income for fiscal 2013 would range between $10 million and $50 million, down from previous guidance of $220 million to $235 million.

The ratings service lowered the ratings to BBB from BBB high, with the trend remaining negative.

"The rating downgrades reflect DBRS’s view that the announced substantial charges and provisions are further indications that the legacy projects and problems from the former management may be larger than previously expected, difficult to predict and have the potential of distracting current management from its effort to restore SNC’s profitability and reputation," DBRS said in a news release.

The company had described the additional provisions as "one-time events not expected to further affect future profitability."

However, the ratings service maintained its negative trend applied in August due to challenges facing the company over the next 12 to 18 months that will be crucial to its future.

It said the BBB ratings could be lowered again if the company fails to continue efforts at improving its risk management culture and in restoring sustained profitability as of 2014.

The ratings are expected to be reviewed in March after SNC releases its full-year results.

Meanwhile, DBRS said SNC's investment grade rating is supported by valuable infrastructure concession investments, engineering and project delivery capabilities in core segments, low debt and "satisfactory" liquidity of $789 million as of June 30.

Sara O'Brien of RBC Capital Markets said the ratings review suggests SNC is unlikely to sell its stake in Highway 407 given the cash flow generated from dividends.

The analyst also wrote that she doesn't expect Standard & Poor's to revise its BBB rating with a negative outlook.

O'Brien also noted that keeping the investment grade rating provides SNC with some "breathing room" given the lines of credit needed to cover its letters of guarantee that totalled $2 billion in 2012.

On the Toronto Stock Exchange, SNC's shares were down 14 cents at $41.99 at midday Thursday.