McDermott financing lifeline faces possible bondholder hurdle

By Kriti Gupta and Allison McNeely on 10/22/2019

NEW YORK (Bloomberg) - McDermott’s bondholders could make it difficult for the embattled energy-industry contractor to make further draws on its $1.7 billion rescue loan.

The company said Monday it received an initial $550 million term loan and $100 million in letters of credit to help stabilize its business and ward off bankruptcy. But it will need 95% of its unsecured bondholders to agree to swap into new payment-in-kind notes if it wants to be able to access the next $250 million of financing, said Valerie Potenza, head of high-yield research at Xtract Research. PIK notes allow borrowers to defer interest payments.

“I don’t think the signing up of this financing facility takes restructuring off the table,” she said in a phone interview.

McDermott’s stock slumped about 13% Monday and its bonds fell as investors fretted about uncertainty over its free cash flow and 2019 outlook, the high interest rates on the rescue loan, and the hurdles it faces accessing the remaining balance of the $1.3 billion term loan and $400 million in letters of credit. The company’s announcement had initially boosted the shares as much as 29% and sent its bonds rallying.

To obtain the financing, McDermott projected free cash flow of negative $1.2 billion for this year, according to a presentation on the U.S. Securities and Exchange Commission website. That’s almost double the negative $640 million previously seen. It agreed to pay around 10% interest rates on the rescue loan, withdrew its annual guidance and said it was halting efforts to sell its industrial storage tanks business.

While the financing is a lifeline that may help McDermott avoid bankruptcy, the outlook withdrawal signals “near-term performance uncertainties or working capital challenges,” Bloomberg Intelligence analyst Scott Levine said. The company’s stock and bonds have cratered after it struggled with debt taken on from its $3.5 billion acquisition of Chicago Bridge & Iron Co. It’s also grappling with reduced spending by the oil and gas industry.

The company plans to use the new funds to finance working capital and support the issuance of performance guarantees. It also awarded retention bonuses to some top executives, including $3.4 million for Chief Executive Officer David Dickson. He will receive one-third of the total bonus upon the effective date of the financing agreement, another third on the funding date of the second tranche of debt, and the rest on the funding date of the third tranche.

The initial $650 million is part of a rescue financing package totaling $1.7 billion provided by some of its existing secured lenders, according to a filing Monday. Convincing 95% of bondholders to exchange their notes is “the big first big hurdle,” and it’s required for the company to access the $150 million “tranche C” debt and $350 million “tranche D” debt, Potenza said.

To be sure, the company could get consent of two-thirds of its secured lenders to waive the bondholder swap requirement, but that would reduce its borrowing capacity to about $1.3 billion and constrain access to lenders of credit, which are essential to operate its business, according to Potenza.

Rise and Fall. Shares of the company tumbled as much as 14%, and ended down about 13% in New York. While its 10.625% bonds due 2024 posted the biggest gain and volume among high yield debt on Monday, they reversed that advance. They led high-yield market declines, dropping 4 cents on the dollar to about $0.245. The debt now yields nearly 62%.

The company said it’s still exploring a sale of its Lummus Technology unit and its pipe-fabrication business. It said last month it had received expressions of interest valuing Lummus at as much as $2.5 billion.

The company specializes in building and installing large, expensive items like oil platforms and natural gas plants. It’s currently constructing Sempra Energy’s giant Cameron liquefied natural gas complex in Louisiana. Lummus licenses technologies used in petrochemicals, refining and gas processing, and holds more than 3,100 patents.

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