The following is based on prior events, reading the 2019 Q3 Earnings and conversations with McDermott employees.
- Company hires multiple restructuring firms
- Company secured $650M Bridge Loan (despite CATASTROPHIC terms)
- Board issues Retention Bonuses
- Missed $69M Debt Payment
- 2019 Q3 Earnings - $1.9B operating loss
- CFO resigns
The direction is obvious. This is the equivalent of watching an iceberg melt. It is a slow and inevitable demise.
Everything suggests the company is headed towards Chapter 11 Bankruptcy. In this scenario, restructuring is the path forward. The terms of the Bridge Loan are catastrophic. As stated in previous posts, McDermott does not get the full $1.7B upfront. The money is divided in Tranches. For those who are not familiar with financial terms, Tranche is a portion of funds made available with it's own terms. In this case, the Bridge Loan has 4 Tranches (A,B,C and D). Think of the Tranches as gates. McDermott has to meet all requirements for A to make it to B, all requirements for B to make it to C, and so on, etc. Some of those requirements are tall asks, like refinance 95% of existing debt. That is almost impossible.
Tranche A is $650M and made available immediately. That money was supposed to be used to keep the creditors at bay and the projects financed. The $69M for the debt payment (bond coupon) was not paid. They were hoping to either renegotiate terms, or float the payment until the next tranche.
To summarize the mechanism of the loan, in order make it through all 4 Tranches, the company has to sell Lummus to cover the Bridge Loan + interest of 12%. That would be $1.7B + $204M = $1.904B. Initially, DD said he could get $2.5B for Lummus. If that was the case, then McDermott would sell Lummus and have a little surplus to cover additional needs on the balance sheet.
There is not a lot of optimism the company will make it through Tranche D.
In the earnings report, it mentions at several points the lack of optimism to survive the current situation. "In addition, the lenders may, in their sole discretion, decline to fund any applicable tranche under the Superpriority Credit Agreement, even if all conditions precedent to funding an applicable tranche have been met. As a result, we are unable to conclude that the satisfaction of those conditions is probable, as defined under applicable accounting standards. Accordingly, because we can provide no assurance that we will meet all the conditions to access the additional capital under the Superpriority Credit Agreement or that the lenders will lend the additional capital, and our inability to obtain this capital or execute an alternative solution to our liquidity needs could have a material adverse effect on our security holders, there is a substantial doubt regarding our ability to continue as a going concern."
Translation: McDermott can not get $2.5B for Lummus. The offers they are getting are less than the $1.7B, let alone the $1.904 that's due with the interest.
Opinion: The Board issued Retention Bonuses as golden parachutes to the executives because they don't confidence in a McDermott survival without restructuring with Chapter 11.
In the event of a Chapter 11, I believe restructuring is the option the company will be forced into to attempt to repay that bondholders, superpriority note holders, and other debt holders. according to the Q3 Earnings, there is $20B in backlog. This is too much work to walk away from.
Let's talk about how this would look in real life. I think it would happen on a Friday AFTER the company makes payroll. This is for two reasons: 1) allows the company 2 weeks before Engineering and Staff payroll is due again, to get financials in order to pay the next payroll run. 2) they can attempt to hide news over a weekend when news organizations and employees are distracted with the weekend. I think there is a possibility of a "staff holiday" or "construction holiday" of a week. This will allow the company to get financials in order to continue work on the projects. The most important thing would be the continuation of the projects. I would suspect lots of encouraging emails and marketing slogans "The NEW McDermott!". I encourage all employees to be prudent with your money. If you are in the market for a new house, close as soon as possible. If you are thinking about a new boat, hold off until next year. If you are young and have very little debt, enjoy the ride and soak up this experience because what comes next, you will never forget. Nobody forgets their first bankruptcy.