Tag Archives: Debt restructuring

McDermott executives enrich themselves as company gets expensive new financing

Photo: Nandu Chitnis

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.

Retention Bonuses

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.

Mukherjee is the executive who stole trade secrets from TechnipFMC

SEC filing – McDermott

 

McDermott moves closer to large debt restructuring

Photo: Nandu Chitnis

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.

Disastrous acquisition

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!

Backlog

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.

https://www.prnewswire.com/news-releases/mcdermott-statement-300921007.html