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The stock of SNC-Lavalin has been falling for months.Paul Chiasson/The Canadian Press

SNC-Lavalin Group Inc.'s credit rating has been downgraded to junk status by Standard & Poor’s, which cited the potential for the company to lose more money on construction and engineering contracts.

The bond-rating agency on Monday lowered the rating on SNC-Lavalin’s senior unsecured debt to double-B-plus from triple-B-minus and maintained a negative outlook. The move, which could make it more expensive for the Montreal-based engineering company to borrow money, comes weeks after SNC reported a $2.1-billion loss for the second quarter, prompting it to cut its dividend for the second time this year.

SNC-Lavalin’s stock has been falling for months amid a political crisis over unresolved bribery and fraud charges. The company has announced several strategic shifts, but its largest shareholder, Caisse de dépôt et placement du Québec, has called for cultural changes “across the board.”

“The downgrade really reflects the losses that the company experienced over the past three quarters. We saw more risk going forward than we previously assumed,” S&P credit analyst Alessio Di Francesco said in an interview. “But the downgrade primarily reflects the losses on the lump sum turnkey contracts [LSTK], which we believe indicate weaker operating efficiency and a weaker financial risk profile.”

SNC-Lavalin said that it will drop bids on LSTK contracts, which carry a higher risk of the company having to take responsibility for unexpected costs and budget overruns. The contracts, worth billions of dollars, include several Canadian infrastructure projects.

“This update follows our [second-quarter] results, however, we remain committed to maintaining an investment grade credit rating," SNC-Lavalin spokesperson Daniela Pizzuto said in a statement. "To that end, the company is pursuing a new strategic direction that will tackle the root cause of our short-term cash flow considerations – namely LSTK contracting, which we have exited.

"By exiting such contracting and splitting it off from what is otherwise a healthy and robust business, we expect to see more consistent earnings and cash flow.”

S&P initially placed SNC-Lavalin on watch for a possible downgrade in July after the engineering company said that it expected weak second-quarter results, Mr. Di Francesco said. But poor earnings results and potential problems with some remaining fixed-price contracts signalled even greater issues than expected, he added.

“The magnitude of losses that we saw recently lead us to believe that there is more risk in the remaining lump sum turnkey contracts that the company still has to work through,” Mr. Di Francesco said. “We also see other risks for potential slower growth in the economy and unresolved fraud and bribery charges.”

The troubled company has been trying to recover since it said in October that the federal director of public prosecutions had declined to negotiate a deal to defer bribery and fraud charges. Its attempt to get an agreement plunged the Trudeau government into political controversy. Former attorney-general Jody Wilson-Raybould said she faced pressure from the Prime Minister, his key advisers and some cabinet ministers to overrule the director’s decision.

Analysts expected the downgrade after SNC’s warning of poor earnings, according to RBC Dominion Securities. SNC-Lavalin bonds have traded down in price since mid-July when the company announced a strategic shift that would see it stop bidding for LSTK contracts.

“We view today’s news as largely neutral given the largely anticipated move by S&P and the fact that we see largely limited impact from the credit downgrade to non-investment grade,” RBC analyst Derek Spronck said in a note, adding that the move could weigh on bonds but is “not likely to impact equity holders or operations.”

The downgrade will move SNC-Lavalin’s bonds to FTSE Canada High Yield Bond Index from the investment-grade FTSE Canada Universe Bond Index.

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