Oilfield services provider McDermott International Inc. filed for Chapter 11 bankruptcy protection Jan. 21 after years of financial struggle caused largely by falling oil prices and pressure on drillers to prioritize shareholder dividends over production growth.
The bankruptcy filing, supported by more than two-thirds of all McDermott's funded debt creditors, will equitize nearly all funded debt, or debt with maturities beyond one year or one business cycle, and allow the company to emerge with a committed letter of credit financing and only $500 million of funded, or long-term, debt.
The restructuring transaction will be implemented through a prepackaged Chapter 11 process that will be financed by a debtor-in-possession, or DIP, financing facility of $2.81 billion.
Subject to court approval, expected within about two months, McDermott expects the DIP financing, combined with cash generated through the sale of Lummus Technology, to enable it to stabilize its cash flows, continue operating in the normal course and fulfill its commitments to key stakeholders, including customers, suppliers, joint-venture partners, business partners and employees, the company said in a Jan. 21 news release.
As part of the restructuring plan, McDermott will sell its technology arm Lummus Technology LLC to a joint partnership between The Chatterjee Group and Rhone Group LLP for a base purchase price of $2.73 billion, or to the highest bidder of an auction expected to be held in about 45 days.
McDermott, which provides engineering and construction services to the oil and gas exploration and production industry, began to falter in 2014 when surging shale production coupled with a crash in global demand cut Brent crude prices roughly 40%. Its troubles accelerated with the 2018 acquisition of Chicago Bridge & Iron Co. NV, which increased the company's debt burden to about $4.3 billion.
Problems mounted as producers slashed capital spending budgets in response to pressure to cut spending in favor of investor returns. Diminished demand resulted in an oversupply of oilfield equipment and services and pressured pricing for oilfield services companies through 2019.
The company's troubles were exacerbated by losses resulting from two LNG projects — the Sempra Energy-led Cameron LNG terminal in Louisiana and the Freeport LNG Development LP facility in Texas. McDermott explained the losses in Cameron LNG in regulatory filings, attributing them to poor labor productivity and increases in construction and subcontractor costs. With Freeport LNG, McDermott's losses also climbed as the company lowered its estimate of claim proceeds associated with Hurricane Harvey, which caused flooding that combined with contractor execution delays to push back the project.
McDermott said in securities filings that the company determined by September 2019 that the ongoing work on the delayed and cost-intensive LNG projects, coupled with the demands of a near-record level backlog of new projects, left it thin on cash and in danger of failing to comply with lending agreements.
For the third quarter of 2019, McDermott reported a massive net loss of nearly $1.89 billion on revenue of $2.12 billion, compared to net income of $2 million on revenue of almost $2.29 billion in the year-ago period.
S&P Global Ratings downgraded McDermott's issuer credit rating to CC from CCC with a negative outlook ahead of the third-quarter earnings report and lowered it again to SD, or selective default, in December 2019 after McDermott missed an interest payment on its senior unsecured notes due 2024 and entered into a forbearance agreement with noteholders until Jan. 15, 2020.
A plan to raise over $1 billion by divesting its storage tank and U.S. pipe fabrication businesses, which was intended to close in the third quarter 2019, was halted in October 2019, three months after the sale of a portion of the pipe fabrication business was completed. McDermott said at the time that it was still considering options for Lummus Technology, which was the subject of unsolicited offers that valued the unit at more than $2.5 billion, and that it was withdrawing its previous guidance for 2019.
In mid-September 2019, rumors that McDermott had retained a Chapter 11 advisory firm sent its shares on the NYSE falling, from $5.88 per share to $1.58 per share within two days.
Weeks later, McDermott signed a financing agreement with secured lenders that gave it immediate access to a $550 million term loan facility and $100 million through a letter of credit facility. An amendment to its superpriority credit facility in December 2019 gave the company an additional $250 million term loan and $100 million letter of credit capacity. The company said it would use the proceeds from both to finance working capital and to support the issuance of required performance guarantees on new projects.
Despite the new financing, The Wall Street Journal reported Dec. 30, 2019, that the financially strapped company could file for bankruptcy within weeks. The news sent the price of McDermott stock, which was already under a delisting warning from the NYSE, down 49.7% to a closing value of 75 cents per share.
As a result of the upcoming Chapter 11 filing, McDermott expects to be delisted from the NYSE within the next 10 days. McDermott's common stock will continue to trade in the over-the-counter marketplace throughout the Chapter 11 process.
On the news of the Jan. 21 bankruptcy filing, McDermott stock sank 23 cents, or 3.17%, on the NYSE to 70 cents per share.
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