DBRS Morningstar Assigns Issuer Rating of BBB (high) with a Stable Trend to WSP Global Inc.

DBRS Limited (DBRS Morningstar) assigned an Issuer Rating of BBB (high) with a Stable trend to WSP Global Inc. (WSP or the Company).

This rating action reflects the Company’s appropriate and effective response to the Coronavirus Disease (COVID-19) pandemic, with approximately 90% of the workforce working from home during the peak of the pandemic in the summer of 2020. While net revenues in 2020 were below initial expectations, the impact on operating earnings and cash flows was substantially mitigated by higher margins as a result of reduced costs from cost-containment measures and cost savings from office lockdowns and travel restrictions. The rating also reflects WSP’s strong investment-grade business and financial risk profiles, including the expected business profile strengthening and financial profile normalization from the acquisition of Golder Associates (Golder), which closed on April 7, 2021. This Canadian engineering consulting services firm focuses on earth science and environment activities, and therefore supports a key goal in WSP's 2019–21 Strategic Plan. The Golder acquisition marks the continuation of the Company’s consequential global expansion strategy after a relatively brief hiatus because of the coronavirus pandemic and is broadly consistent with DBRS Morningstar's expectations. This applies especially with respect to the financing plan, which includes a material equity capital portion. DBRS Morningstar considers WSP’s normalized leverage level, to which it has returned with the closure of the Golder acquisition, to be supportive of the current rating.

Pillars of WSP's Business Risk Assessment (BRA) strength include the Company’s world-class reputation for engineering/consulting excellence in a business with attractive long-term demand fundamentals; the management team’s demonstrated ability to execute its large-scale acquisitions without materially weakening the Financial Risk Assessment (FRA); WSP’s globally diversified operations (almost 90% of activities are undertaken in Organization for Economic Cooperation and Development countries); above-average profitability; and an impressive set of globally and sectorally diversified public and private clients, many characterized by long-term relationships with repeat customers that comprise more than 50% of the Company’s annual revenues. Like all firms in the sector, the Company faces reputational risks that could affect the firm’s ability to win awards in the future and may expose the Company to litigation. Furthermore, the Company is not immune to macroeconomic downturns, but its degree of diversification in several respects acts as a significant mitigant.

The most conspicuous development in 2020 was the onset of the coronavirus pandemic. Although net revenues were essentially flat in 2020 compared with 2019, EBITDA and operating cash flow increased modestly. While this reflects contributions from acquisitions and the generally resilient nature of the engineering consulting sector, it also illustrates some of the success the Company has had in blunting the impact of the pandemic with cost-containment measures. Approximately $551 million of net equity capital was raised in 2020, and free cash flow generation was very strong at $704 million based on DBRS Morningstar's calculation approach and adjusting for the cash portion of nonrecurring items. This allowed for more than $850 million of net debt repayments over the course of the year. As a result, key credit metrics at the end of 2020 were extremely strong, moving to the upper end of the investment-grade range.

The closure of the Golder acquisition marked an immediate positive contribution to WSP's BRA, as it improves the balance of the suite of service offerings and represents additional exposure to higher-margin Earth Sciences and Environmental activities. As the Golder operations are integrated into the fold, DBRS Morningstar anticipates that the BRA will likely improve over the next 12 months given the favourable underlying prospects for Golder's key service sectors. Complemented by the expected 2021 operating performance, WSP is well-positioned to achieve its 2019–21 Strategic Plan goals. The closure of the Golder acquisition also marked a return of the FRA to a more normalized level with key metrics in the BBB and “A” ranges from the extremely strong levels as at December 31, 2020. The Golder financing is consistent with DBRS Morningstar's expectations for a target of this magnitude. Note that the acquisition was executed at approximately 10.4x Golder’s estimated 2020 pre-IFRS 16 adjusted EBITDA (~8.4x post-synergies).

WSP's global expansion strategy brings with it integration, financial, and other risks. While this strategy has been prudently and successfully executed thus far, severe integration/execution problems could lead to a negative rating action, as could a prolonged global economic downturn and/or a material reputational risk event. Furthermore, a departure from the Company's targeted leverage level on a sustained basis could also lead to a negative rating action if DBRS Morningstar felt that this represented a change in the long-term financial/credit strategy. Benefits from acquisitions that materially enhance the structural business risk assessment could lead to a positive rating action, but DBRS Morningstar does not expect this to be achieved in the near term, especially in the context of the current, already very strong investment-grade business risk profile. Note that while the favourable Golder contributions to the BRA are material, given WSP's already very strong BRA profile, the impacts are not sufficient to affect the overall rating.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodologies are Rating Companies in the Services Industry (January 29, 2021; https://www.dbrsmorningstar.com/research/372947) and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 14, 2021; https://www.dbrsmorningstar.com/research/372344), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrsmorningstar.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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