On January 21, 2020 McDermott International announced its intention to “commence [a] prepackaged Chapter 11 filing in the U.S. Bankruptcy Court for the Southern District of Texas (“the Court”) later today“. In a press release, the oil field services giant indicated that “two-thirds of all funded debt creditors” had agreed to a re-structuring package that would “de-lever” its balance sheet. That’s a massive $4.6bn of debt getting vaporized. The company hopes to re-emerge with just $500mn of funded debt and the ability to provide letters of credit in support of work projects – a critical aspect of its business. That will mean “nearly all funded debt” will be converted to equity.
To move the Chapter 11 along, McDermott has arranged $2.8bn in Debtor-In-Possession (DIP) financing. As has been frequently the case recently in these “pre-packs” the company hopes to be in and out of bankruptcy in a short period: two months is the estimate given till court confirmation of the plan is expected.
We learned from the press release that subsidiaries of McDermott have entered into a share and asset purchase agreement with a joint partnership between The Chatterjee Group and Rhône Group which will serve as the “stalking-horse bidder” in a court-supervised sale process for Lummus Technology. The sale of this subsidiary has been a key element in the MCDermott saga. Here are the key details from the press release:
Under the terms of the Agreement, the Joint Partnership has agreed, and is committed, to acquire Lummus Technology for a base purchase price of $2.725 billion. McDermott will have the option to retain or purchase, as applicable, a 10 percent common equity ownership interest in the entity purchasing Lummus Technology. McDermott expects to hold an auction in approximately 45 days to solicit higher or better bids for the Lummus Technology business. Either the Joint Partnership or the winning bidder at the auction will purchase Lummus Technology as part of the Chapter 11 process, subject to regulatory and court approval. Proceeds from the sale of Lummus Technology are expected to repay the DIP financing in full, as well as fund emergence costs and provide cash to the balance sheet for long-term liquidity.
We’re not bankruptcy experts so we don’t know what the odds are of the McDermott plan – which is ambitious by any standard – being accepted in its current form and timetable. More certain is that the two BDCs involved are likely to lose the $0.700mn of annual investment income being accrued and some sort of realized loss will be booked in 2020. The only BDC with material exposure as of September 30, 2019 was non-listed Business Development Corporation of America, with $9.8mn invested at cost in the May 2025 Term Loan, already written down (35%) as of the IIIQ 2019. Oaktree Strategic Income (OCSI) has a tiny $0.6mn exposure in the same Term Loan.
For our part, we’ve had McDermott on our Under Performers list since July 2019 and with a Corporate Credit Rating of 4 (Worry List) for months. Since October 2019, we’ve added the company to our Bankruptcy Imminent list, where we seek to flag for readers those credits most likely to hit the headlines. For all prior McDermott articles, click here. We expect there’ll be one or two more follow-up articles as the restructuring plays out, but the McDermott credit story seems closer to the end than the beginning.