Next 90 Days - Lummus, Chapter 11 and Uncertainty - post regarding McDermott International Inc. layoffs

Next 90 Days - Lummus, Chapter 11 and Uncertainty

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.

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6 replies (most recent on top)

Going concern warnings are rare and meaningful. The "threshold" for identifying going concern as a risk is not "low."

B&W? No, I said "of note." They are almost 1/10 of our size. And they reduced headcount by 40% last year.

Layoff w/o bankruptcy or layoff w/ bankruptcy. Does it matter if you're getting laid?

"Risks recited in the 10K/Q tend to have a low threshold to the point of being boilerplate, but not going concern warnings. There was Sears, anyone else of note?"

This is rhetorically suspect. There is obviously a going concern risk when the bonds trade as they do. Plenty of other companies that have transitioned from earlier liquidity crunches that nevertheless still contain similar risk disclosures even though the darkest days seem to have passed. There is Babcock and Wilcox, anyone else of note?

You seem smart, but your comments are so misleading and seem designed to induce further panic rather than offer new information. All of your facts are known, and your analysis leaves me wanting more. I don't agree about the timing of a Chapter 11 filing. My understanding is that this would be driven by liquidity and when the board could meet. Unless they do a pre-packaged deal, there is no gaming the filing date. It's too hard to keep under wraps, and there's too much exposure if you don't. The Chapter 11 Petition contemplates the need for urgency which is why the initial petition can be completed with about fifteen minutes worth of data entry and $1000.

But I fail to see how any of this relevant right now! Your best case scenario is that this is an issue several months in the future.

Risks recited in the 10K/Q tend to have a low threshold to the point of being boilerplate, but not going concern warnings. There was Sears, anyone else of note?

But a lot of what goes into the disclosures is negotiated by Legal, the auditors, the board. If there's a going concern disclosure, it's based in part on a third party professional assessment of the risk
and significant CYA. And it is gravely serious.

Will the lenders throw good money after bad? Probably, if it doesn't require a current cash outlay and keeps them from having to write off the debt. Kicking the can down the road is a great way to get that Xmas bonus at a bank.

Will MDR get $2.5bn for Lummus? That would be a premium price paid to a motivated seller. Hard to imagine. But maybe MDR points a gun to their own head and says "$2.5bn or I got nothing to live for." But then again an expression of interest and a signed financeable deal heading to closing are two different things. DD is the same one who said he would get $1bn for tanks and pipes, 6 mos later the estimate was revised down, another 6 mos and here we sit with no deal. I'll believe it when HE stops talking. Has anything HE'S said turned out to be true? Anything? ANYTHING?

So let's say they get $2.5bn for Lummus, $1bn for tanks & pipes. Where does the rest of the working capital gap come from? Some of it gets moved around the balance sheet from current to noncurrent, but that's still money that will come due. And from a company with heavy debt, heavy payroll, limited ability to finance more work, and is at risk of not being around to deliver on their current backlog. Would you hire a homebuilder that might go bankrupt, halt work on your construction, and weasel out of LD's in BK? Would you sign onto a in a JV and maybe get left holding the bag for LD's?

Where will the big buck c-apshoots that get us those big upfront cash payments come from? And without Lummus etc where will the steady cash come from?

And then what about payroll? How will we meet payroll? Stable cash comes from tanks and pipes. GONE! High margins from Lummus. GONE! Big money from procurement. Mostly GONE! So we're left with low margin man-hours-based construction and topsides. How do we not slash jobs?

A lot of payroll will go with the business. But how long will that take? Have you heard any deals announced yet?

This is going to be slow, painful and inevitable. Right, maybe these guys pull off the impossible. But if they had any control over the situation under much less dire circumstances, would we be here now? Staring into the abyss?

I don't believe Lummus will be sold for $1.7b.

First, MDR wouldn't be able to pay down enough debt to avoid Ch 11, so there would be no incentive to sell. Second, under bankruptcy protection, management will argue that the outlook for MDR is be far better if Lummus is retained post bankruptcy. So if anyone has serious interest in Lummus then I would think they'd be compelled to make a full and fair offer during the current bidding.

I'm just curious as to why Barclays even bothered with Tranche A given the impossibly high 95% hurdle for the follow on Tranches.

They also don't have to refinance 95% of all there debt. The need to get 95% of the holders of 1/3 of there debt to agree to take payment in kind instead of payment of interest for a period of time That could be a payment in warrants, increase in principal, (or both) for a period of 18 months. Long enough for the secured holders to know that the money they are injection is to fund an operational bridge not a bond holder bailout. The people putting in the money would have to put in the money ANYWAY....they are secured by the assets of the company (people, ship, contacts, etc) if they were to take over tomorrow they still have all of the contractual obligations of the company....so to protect there secured interest they are giving this a shot instead of BK which would be very disruptive.

This is a very compelling post. But there are certain obvious problems with your attempted savvy speak.

First, you cite what is certainly the kind of identified risk that one would expect to appear in the latest 10Q. Anyone who has spent any time reading Qs and Ks knows that the threshold to insert a potential risk is shockingly low.

Next, your translation that they cannot obtain a high enough sale price for Lummus is not very compelling. There is simply no good reason for the company to offer the information that they have received an unsolicited offer for $2.5 billion if it were not true. It's too close in time, and the false statement would create liability for everyone associated with it, and (this is very important) there was nothing compelling to make any kind of statement at all. That is, why do they need to state that the offer is there at all? To shore up the price of the common?? I think not. The price was already in the pits. Are you asserting that it was lie to hit back at the shorts? It would pretty much need to be. But companies on the verge of bankruptcy do not behave this way.

MDR may indeed end up in bankruptcy, but it will not be as you describe. The $650M is likely enough to carry it through another quarter. And no lender is going to throw good money after bad unless there's more to the turnaround plan then you seem to give them credit for.

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Next 90 Days - Lummus, Chapter 11 and Uncertainty

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