The news surrounding McDermott International keeps getting worse as its liquidity crisis deepens. Just in the past week, it has emerged that
- the company has hired Kirkland & Ellis (legal) and AlixPartners LLP (Financial advisers) to advise it on its debt restructuring.
- A group of bondholders has hired Paul Weiss Rifkind Wharton & Garrison (legal) and Houlihan Lokey (Financial advisers) to advise them.
- Another group of lenders has hired Davis Polk & Wardwell as counsel (Jones Day was initially hired but had to step down due to a conflict) and Centerview Partners.
- The company has hired Evercore to help it sell Lummus, a technology business for $2.5 billion.
- The company is seeking a bridge loan to help it cover a $1.7 billion working capital deficit until it can sell an asset such as Lummus.
- Moody’s downgraded McDermott one notch to B3 (speculative, high credit risk).
When the news broke that McDermott had hired Kirkland & Ellis, the go-to legal firm in Houston for restructuring, the company issued a weak statement that stated ‘it routinely hires external advisors to evaluate opportunities for the company.’
Debt trading at big discount
The company’s $2.2 billion term loan is quoted at 77 cents on the dollar. In contrast, the $1.3 billion 10.625% unsecured notes have been trading at 36 cents. A key date coming up is November 1 when there is $69 million of note interest due to be paid.
The share price is currently $2.15 (market cap $427 million), down from $21 in May 2018.
The problems stem from McDermott’s disastrous acquisition of fellow Houston company, CB&I in May 2018 for $4.1 billion ($2.4 billion cash, $1.7 billion stock). CB&I had a lot of legacy Engineering & Construction projects that have turned out to be much less profitable than McDermott expected at acquisition.
The costs to complete estimated at acquisition on just 3 projects (Cameron LNG, Freeport LNG and Calpine Power) increased by over $1 billion. As a result, the goodwill on CB&I ended up being $4.8 billion. McDermott wrote down $2.1 billion in goodwill 7 months after acquisition. That’s a quick destruction of shareholder value!
Since acquisition, the costs to complete on these three projects increased by an additional $199 million in 2018. For the first 6 months of 2019, costs on all major projects have increased by $116 million. No wonder the company is having cash flow problems.
Of course, all those high-priced lawyers and financial advisors have to be paid too!
One thing in its favor is that the company has record backlog of $20.5 billion. Having worked at a large E&C company in a former life, I know from personal experience that investors & lenders view backlog has having value (‘somebody must be able to make money on $20 billion of revenue!). However, if you can’t execute, there is no value.