McDermott International has obtained $1.7 billion in additional financing as it grapples with a growing liquidity crisis. The financing is expensive, with loan interest rates of 10% above the Eurodollar rate (i.e almost 12%). As well as large fees, the lenders will also get a 15% equity stake.
$650 million was made available immediately. A second tranche of $350 million will be made available in December. A third tranche of $150 million will be made available as soon as January 2020. The final tranche of $550 million will be made available in Q1 2020. The availability of future tranches is subject to McDermott delivering on its forecasts and the approval of 95% of existing bondholders.
In addition, the lenders will also receive new equity up to 15% of the company’s issued share capital. The $1.7 billion facility is gross of $200 million of fees, expenses and interest costs through the mid-2020 trough.
Sharp fall in EBITDA and free cash flow
- The company announced that its adjusted EBITDA for 2019 will fall from $725 million (previous guidance issued in late July) to $474 million.
- Free cash flow for 2019 will fall from negative $640 million (previous guidance) to negative $1.2 billion.
- John Castellano, Managing Director at AlixPartners has been appointed Chief Transformation Officer, reporting to the CEO.
The EBITDA adjustment is a result of an additional $80 million of costs on the Cameron LNG project, $33 million on the Freeport LNG project, $67 million on other projects and an additional $70 million contingency.
The Cameron LNG project is now projected to incur an overall loss of $1.7 billion (on a contract value of $6.9 billion). The Freeport LNG project will lose $700 million on a contract of $7.5 billion. These projects were part of the disastrous CB&I acquisition in 2018. I wrote about this last month.
The free cash flow deterioration is due to $150 million outflows on projects, $107 million due to a possible delay in a project award and $301 million in unrealized net working capital improvements (!).
Sale of businesses
The company was planning to sell the industrial storage tank business. However the net cash proceeds would likely be significantly below initial expectations. As a result, the business has been pulled off the market.
The company is still planning to sell Lummus, its technology license business. This could be worth as much as $2.5 billion.
For this spectacular deterioration of the business since July the Board of Directors has decided to award retention bonuses to certain senior executives. A third is payable immediately, a third when Tranche B is funded (Dec 2019) and rest when Tranche C is funded.
- David Dickson, CEO – $3.375 million
- Samik Mukherjee, COO – $1.4 million
- Stuart Spence, CFO – $1.3 million
- John Freeman, Chief Legal Officer – $510,000
- Ian Prescott, Senior VP, Asia Pacific – $425,000
In addition to the large sums, note the disconnect in that the senior executives get all their retention bonuses paid out before the $550 million Tranche D payment is made available. That’s not right.