UPDATE: Dec. 5, 2019: McDermott officials announced earlier this week that the petroleum contractor has entered into an agreement with holders of more than 35% of its senior notes, which are due to be paid back by 2024. Although the company missed a Nov. 1 interest payment on the notes, the debtors have agreed to waive their rights regarding the payment through Jan. 15, 2020, and possibly longer if a majority of the holders agree to it.
The agreement with note holders is expected to allow McDermott to "continue collaborative discussions regarding a long-term balance sheet solution," according to a press statement, which also noted that the contractor is continuing to pursue a sale of its Lummus Technology division, valued at up to $2.5 billion.
The notes are part of a $1.7 billion superpriority senior secured credit that the company announced on Oct. 21, which ensures investors will be paid ahead of any other creditors.
Moody's Investors Service Analyst Michael Carelli said the agreement buys the company time to move out of its distressed state.
"The bottom line is that its capital structure is probably not sustainable the way it is set up today, unless they can sell Lummus Technologies for a substantial sum of money, use the proceeds to pay down their debt and stop burning cash with the types of problem projects they have dealt with in the past," he said.
Agreements of this type usually mean that stakeholders are trying to avoid a court-mandated restructuring, Carelli said. A bankruptcy can be considered cause for clients to break existing contracts, which could negatively impact McDermott's $20.5 billion backlog.
In addition, the company is in discussions with additional holders of the 2024 notes and anticipates that they may sign on to the forbearance agreement in the coming days, according to the statement.
- Houston-based petroleum contractor McDermott International has added two bankruptcy veterans to its board of directors, the Wall Street Journal reported.
- The two new board members are lawyer Heather Summerfield, a partner at Dallas-based law firm Arcadi Jackson LLP, and Alan Carr, the managing member of restructuring advisory Drivetrain LLC. Summerfield directed legal strategy for the Exco Resources restructuring during her time as general counsel and Carr served on the board of Lightsquared and Sears Holdings Corp. during their restructurings, according to Bloomberg Law.
McDermott, a provider of engineering and construction services to the energy industry, recently revealed in SEC filings that it had skipped an interest payment due at the start of November and was using the 30-day grace period to negotiate with its lenders.
It has been a tumultuous few months for the energy construction giant. On Nov. 4, CFO Stuart Spence resigned to pursue other opportunities, on the same day the company reported a third-quarter net loss of nearly $1.89 billion on revenue of $2.12 billion. That number is down from net income of $2 million on revenue of nearly $2.29 billion in the third quarter of 2018.
Spence was replaced earlier this month by McDermott chief accounting officer Chris Krummel, who has 25 years of experience in various leadership roles including as CFO of EnTrans International and had served as McDermott's chief accounting officer for the past three years, according to LinkedIn. Senior Director of Financial Planning and Analysis Dale Suderman was named to take over the chief accounting officer role.
McDermott, which merged with Chicago Bridge & Iron Co. (CBI) in May 2018, is the country's second largest petroleum contractor after Fluor, according to Engineering News-Record. The firm reported $6.7 billion in revenue last year.
Since the merger, the company has been in financial difficulties, cutting guidance and losing 35% of its share price in a single day this summer, according to Energy New Bulletin.
While McDermott is "pursuing different avenues to get its debt down to a sustainable level," it appears that the company is doing what it can to avoid a bankruptcy filing, Moody's Investors Service Analyst Michael Carelli told Construction Dive. He noted that the firm's $20.5 billion backlog is strong and "from what I can tell they've been doing right by their customers, making sure they complete their projects effectively," he said.
"If that wasn’t the case they wouldn't be continuing to win bids and build backlog," he said.
In the event that the company does declare bankruptcy, it could potentially lose customers and projects, Carelli said, although many clients would probably stay on.
"For many of their customers on projects that are already underway, they are already invested with the work," he said. "It would entail some work on the part of the customer to rebid the project or negotiate with another bidder."
All in all, company leaders seem to be working on alternatives to filing bankruptcy, "even though the easiest thing might be to file and restructure debts," Carelli said.
McDermott is building one of the largest energy projects in Texas, the $10 billion LNG export facility that Exxon Mobil and Qatar Petroleum awarded to McDermott in March, along with joint venture partners Chiyoda International Corp. and Zachry Group. McDermott said the facility in Sabine Pass will have three 5.2-million-tons-per-year trains and that the team will provide engineering, procurement, construction and commissioning services.
In related news, the Houston Business Journal reported that construction work on McDermott's new headquarters in Houston has stopped. The general contractor filed a lien on the improvements to the building on Oct. 30, saying that McDermott was $14.2 million behind on its payments.
McDermott confirmed that work on the building has been delayed, but spokesperson Gentry Brann told the Houston Business Journal that the company still plans to move the first group of employees to the building before Thanksgiving.