McDermott – Struggling To Avoid Bankruptcy – Seeking Alpha

Shares of ailing oil-and-gas engineering and construction company McDermott International (MDR) fell off a cliff last week after media reports of the company having retained turnaround consulting firm AlixPartners LLP "to advise on efforts to improve cash flow and stem a recent spate of net losses" emerged.

Last year's ill-advised acquisition of Chicago Bridge & Iron ("CBI") is now threatening to take down the combined company after massive losses in legacy CBI projects continue to mount.

Photo: Cameron LNG Facility Construction Site at Hackberry, Louisiana - Source: Mitsui & Co.

Two months ago, McDermott reported an abysmal Q2/2019 and significantly reduced guidance for the remainder of the year. Management's projection for cash outflows to more than double from previous expectations to $640 million for FY2019 was perhaps the most troubling disclosure at that time.

In addition, the company continues to struggle to sell its industrial storage tank business and the remaining part of its pipe fabrication business with a transaction for the storage tank unit now expected in Q4/2019. Aggregate cash proceeds are now expected to be lower than the $1 billion previously estimated by management.

That said, on the conference call, management expressed its satisfaction with the company's cash on hand and available credit facilities of $1 billion in total and insisted on the company's liquidity profile being "adequate" a number of times.

The big question is: If the company's liquidity profile remains adequate and additional cash soon being provided by the imminent sale of the storage tank business, what is the recent fuss all about?

At least when judging by my long lasting experience in corporate debt restructurings, particularly in the energy space, the combination of the above discussed issues almost certainly results in the company filing for bankruptcy at some point going forward.

While not impeccable, bond prices often act as a harbinger for things to come particularly in case of ongoing restructuring negotiations. While bondholders directly involved with the company are usually restricted from trading in the company's securities, this, in many cases, does not prevent information from leaking into the markets.

Moreover, the company's $69 million semi-annual bond interest payment will be due on November 1 and judging by the price action in the bonds, the company might actually consider omitting the payment.

That said, McDermott's bonds have also been on a wild ride recently. After having traded at around 70% of face value for the past couple of weeks, the news of potential debt restructuring caused the bonds to trade down to below 20% on Thursday only to temporarily double on Friday following the company's disclosure to have retained investment bank Evercore to explore strategic alternatives after it "recently received unsolicited approaches to acquire all or part of Lummus Technology, McDermott's industry-leading technology business, with valuation exceeding $2.5 billion" only to fall back into the mid-20% area as of the time of this writing.

Clearly, the majority of bond investors does neither expect the company to remain within its current capital structure nor to be made whole in a potential debt restructuring at this point and I very much agree with them.

Given last week's events, I do not expect the company to close the proposed sale of the storage tank business for the foreseeable future not to speak of the remainder of its pipe fabrication business.

Regarding Lummus Technology, it is very hard to imagine that McDermott could really succeed selling the business in due time at the stated valuation as buyers are used to picking up assets of distressed companies at bargain prices.

While at least one sell-side analyst thinks the hail mary attempt to save the company from bankruptcy could work, I remain doubtful. Moreover, the company's senior secured term loan lenders might object to the proposed sale if they consider a restructured McDermott to be better off long-term by keeping the unit.

While there's undoubtedly a lot of going on behind the scenes at McDermott right now, this doesn't mean that key information hasn't already leaked.

Given the upcoming bond interest payment, a debt restructuring agreement and a subsequent bankruptcy filing could become reality much sooner than many market participants might think at this point.

But there's another issue investors need to consider:

Last week's events didn't exactly help the company to win new business and I fully expect McDermott to be met with increased scrutiny by potential customers and contractors going forward which could cause the downward spiral to accelerate even further.

The company urgently needs to work through the legacy issues mostly inherited from CBI while at the same time stabilizing the balance sheet and potentially shore up liquidity to show its ability to execute on both existing as well as potential future contract awards.

My personal expectation is for the company to enter a restructuring agreement with creditors rather sooner than later with bondholders getting the lion's share of the new equity and current equityholders only receiving a very minor stake in the restructured company.

Given the very real possibility for the common equity to be wiped out entirely, investors should remain on the sidelines.

Expect the shares to remain highly volatile and mostly serve as a playground for momentum traders and speculative retail investors for the time being.

While I have traded the shares on both the short and long side over the past couple of sessions, I do not own a position in McDermott at the time of this writing.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: While I don't own a position in MDR at the time of this writing, as a daytrader I might decide to enter into a short or long position in McDermott's stock at any time.

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McDermott - Struggling To Avoid Bankruptcy - Seeking Alpha