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S&P downgrades McDermott after firm hires external advisers

S&P Global Ratings on Sept. 20 downgraded its issuer credit rating on McDermott International Inc. to CCC from B-.

The Houston-based engineering and construction provider announced Sept. 20 it was exploring strategic alternatives after it received unsolicited offers for all or part of its technology business Lummus Technology LLC, which could value the subsidiary at more than $2.5 billion.

Investors initially welcomed the announcement, however S&P Global Ratings said the move increases the risk McDermott could elect to engage in a transaction the ratings agency would view as a distressed exchange.

McDermott also retained external advisers to evaluate the opportunities — a move Ratings said could include changes to its capital structure.

"We believe this increases the likelihood the company could engage in a transaction we would view as a distressed exchange, where holders of the company's debt could receive less than the original promised value. Such an exchange would help alleviate the high debt burden on the company. Although McDermott doesn't face meaningful near-term debt maturities, we view the capital structure as unsustainable in the long term, with about negative $600 million of free cash flow in 2019," Ratings said.

S&P Global Ratings lowered its issue-level ratings on McDermott's senior secured term loan to CCC+ from B and its unsecured debt to CC from CCC.

Ratings also placed the issuer credit and issue-level ratings on CreditWatch with developing implications, which reflects the potential for a higher or lower rating on McDermott depending on the outcome of its engagement with external advisers.

This follows several quarters of weaker than previously expected operating performance and cash flow.

S&P Global Ratings on Aug. 6 downgraded McDermott's issuer credit rating to B- from B, with a negative outlook and lowered its issue-level ratings on McDermott's senior secured term loan to B from B+ and its unsecured debt to CCC from CCC+.

This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings. Descriptions in this news article were not prepared by S&P Global Ratings.