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Aug 19, 2019

SNC-Lavalin cut to junk by S&P on heightened credit-risk profile

SNC-Lavalin Group Inc. signage is displayed in Montreal.

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SNC-Lavalin Group Inc. was cut to junk by S&P Global Ratings, the latest blow for the Canadian engineering firm at the center of a controversy that’s ensnared Prime Minister Justin Trudeau.

S&P cut the Montreal-based company by one level to BB+, the highest non-investment grade rating, according to a statement Monday. The downgrade reflects the company’s significant losses on lump-sum turnkey projects, which SNC (SNC:CT) plans to exit when its current backlog is complete, the ratings firm said.

“Weaker-than-expected earnings and cash flow along with uncertainty from various headwinds contribute to our view that SNC’s operating efficiency and financial risk profile have deteriorated to a level that no longer supports an investment-grade rating,” S&P analysts Alessio di Francesco and Jarrett Bilous wrote.

S&P assigned a negative outlook due to uncertainty in the company’s ability to recover earnings and cash flow so that adjusted debt-to-Ebitda returns below 3 times by next year. SNC is still rated investment grade at DBRS Inc.

Last week, Trudeau was plunged back into the biggest scandal of his term just two months before elections, after the nation’s ethics watchdog ruled he inappropriately interfered in a judicial matter linked to SNC.

Ethics Commissioner Mario Dion said Trudeau sought to pressure his former attorney general last year to help SNC-Lavalin settle corruption charges out of court, partly for political reasons. Since the engineering firm would have benefited financially from Trudeau’s efforts, the prime minister’s actions contravened conflict of interest laws, the watchdog concluded.

Shares of SNC have tumbled 63% this year after the company issued three profit warnings, wrote down the value of its Middle East energy business and lost a contract in Chile valued at US$260 million. The stock rose 2.4 per cent Monday in Toronto.

SNC’s $300 million of 3.235 per cent notes due 2023 were quoted at about 237 basis points over Canadian benchmark government debt, the widest spread since they were issued in February last year.

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