SNC-Lavalin Group Inc. has been hit with a downgrade from Standard & Poor's Corp., which warned of the risk of weaker profit in the wake of the engineering firm's corruption scandals.
The rating agency, citing high administrative costs stemming from the "ethics issues" at the Montreal company, cut its ratings one notch from BBB+ to BBB with a negative outlook.
SNC, based in Montreal, is mired in corruption and bribery scandals involving its former top executives and tens of millions of dollars in mysterious payments. The scandals involved its operations in Canada and around the world, including Libya, Algeria, Tunisia, and Bangladesh.
As part of its attempts to put the controversy behind it, the company signed a confidential settlement with the World Bank that prevents it from bidding on projects the bank sponsors for up to 10 years.
SNC recently reported a first-quarter profit of $53.6-million, down 19 per cent from a year ago.
The main problem that led to the downgrade, said S&P analyst Jamie Koutsoukis, is that the company is going to be distracted by the current issues for some time, and management's time will be taken up in the administrative work needed to clean up its reputation.
"We are going to see the profitability of the company depressed over the coming year to two years, as they have to implement a lot of their new policies and initiatives," Ms. Koutsoukis said in an interview.
The company has already made many changes in its executive suite and boardroom, and in February it created an entirely new position, chief compliance officer, to make sure that it doesn't break any laws as it looks for contracts in Canada and other countries. It hired former Siemens AG chief compliance officer Andreas Pohlmann, who has a quarter-century of experience in compliance and governance, for the job.
Ms. Koutsoukis said SNC may also have to be more competitive in its pricing, "given the reputation risk they have now." A level of trust is a key component in winning contracts, she said, and that could be a problem, especially with potential clients who are not familiar with SNC and are seeing the headlines in the news.
For existing clients who already know their work, that will not likely be an issue, Ms. Koutsoukis said.
SNC noted in a statement Wednesday that it still has "investment grade" status, despite the downgrade, and that it is unusual for an engineering and construction firm to have that status.
It said the company is not satisfied with its level of profitability, and "is focused on improving project execution and risk management so that these issues are properly managed going forward."
The S&P report notes that SNC still has a satisfactory risk profile because of its very diverse engineering and construction business, and its stable revenue. It also has low debt and "ample financial flexibility," the rating agency said.
Still, the report said, "while SNC's current backlog, at $10-billion, is strong … and has not seen deterioration over the past year in the midst of the ethics issues, we remain concerned that the company's ability to win new contracts is exposed to reputational risk."
S&P said it could downgrade SNC further if the frequency of money-losing projects increases, or if it buys some higher-risk operations.
To move the company back up a notch, it would have to show that the various litigation and investigations it is involved in have been resolved, and that its risk profile has remained stable.