You can't say you weren't warned (here). The mirror on the wall of the Baird offices was right.
On January 21 McDermott International filed for Chapter Eleven bankruptcy protection in the one of the biggest bankruptcy restructurings in the history of the offshore industry, even bigger than the asbestos related bankruptcy protection that the company's Babcock and Wilcox subsidiary entered in 2000 (see here).
And, of course, McDermott immediately paid "long suffering" CEO David Dickson, whose bad strategy and poor judgement drove the company into its present crisis with the disastrous CB&I acquisition, yet another bonus!
Because when the CEO has driven the company into bankruptcy the first thing you should do is pay him yet more cash. That's a basic principle of American CEO leadership in offshore, as we have discussed here and here.
"As previously disclosed by the Company, the board of directors of the Company approved a form of Retention Bonus Award Agreement (the "Retention Bonus Award Agreement") for David Dickson, President and Chief Executive Officer, and Samik Mukherjee, Group Senior Vice President, Projects, which provided for the payment of certain cash retention bonuses (each, a "Retention Bonus"). In accordance with the Retention Bonus Award Agreements, upon the Company's good faith determination on January 17, 2020 that the Company was likely to commence a voluntary proceeding under Chapter 11 of title 11 of the United States Code, the unpaid portion of the Retention Bonus was paid immediately."
Quite what does David Dickson have to do NOT to be paid a huge bonus even as the company fails? The CFO got a supposed retention bonus for leaving in October, and now Dickson gets a bonus because the business is bust. Presumably, when McDermott emerges from bankruptcy protection, he'll need more money to encourage him to perform to new heights. Perhaps he should be rewarded with a "still breathing bonus" to celebrate the capacity of his genius, executive lungs to suck in air?
The full SEC filing is here.
Full credit to John R Castellano, who is Managing Director at restructuring specialist Alix Partners, and who was appointed as McDermott's "Chief Transformation Officer" back in October, as we reported here.
Alix Partners specialises in corporate restructuring before, during, and after, bankruptcy. I will concede that they have done a great job of giving McDermott a chance of a fresh start after two years of chronic mismanagement.
There was lots of good news, apart from for the existing shareholders, who will be completely wiped out, including Barclays, whose 15 per cent stake must be one of the most short-lived equity investments in history. McDermott shareholders get nothing in the restructuring, and their shares will be cancelled.
However, all offshore operations continue the normal way, all customer projects will continue uninterrupted, all employee wages and health and welfare benefits will be paid in normal course, and suppliers will be paid in full as well, the company assured the world. This is how Chapter Eleven should work.
That's the good news. Even better news is that it seems that the company has found a buyer for Lummus Technologies, the "diamond in the trash can" of CB&I. McDermott has found a buyer for the business, a buyer willing to pay more than the US$2.5 billion Mr Dickson had foretold was the value of the business back in October. Better late than never.
The Chatterjee Group and Rhône Group (a private equity company) have formed a "joint partnership' which will be the base case bidder in a court-supervised sale process for Lummus Technology.
Under the terms of the agreement, the partnership has agreed 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, to keep some upside from the business.
McDermott expects to hold an auction in approximately 45 days to solicit higher or better bids for Lummus, the company reported to the SEC. 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, the press release claimed. Selling Lummus will raise the cash to pay back a significant chunk of McDermott's debt. This is a great result and a good price.
Additionally, the company has agreed a so-called "debtor in possession" financing facility of $2.81 billion. I can bet that "debtor in possession" will be one of the most searched terms in Houston this week. This means that McDermott's lenders will provide money to fund its operations, under Chapter Eleven bankruptcy protection.
McDermott said that court confirmation of the plan is expected within approximately two months from filing, which is very fast and very efficient. Well done, Alix Partners.
Most of the company's existing debt will be turned to equity in the restructuring. As a result, McDermott will eliminate over $4.6 billion in debt from its balance sheet, including the sale of Lummus.
The company said that it has secured committed exit financing of over $2.4 billion in letter of credit facility capacity, and will emerge from Chapter 11 with approximately $500 million in funded debt.
Great, most of the debt disappears, the CEO gets a bonus, and everyone is happy? Except the shareholders, but silly them for sticking with their investment.
This would all be wonderful, if it were not for the fact that McDermott's underlying CB&I business remains an absolute dog. McDermott went into bankruptcy protection because the CB&I projects were bleeding cash from the business.
As the company's own FAQ puts it:
"Despite this operational success, the 'focus projects' (Freeport and Cameron LNG) have significantly strained McDermott's finances, and have made it difficult to maintain a timely balance between cash received from customers and cash spent on projects. To resume growth, McDermott's capital structure must change. Undertaking this financial restructuring, including a prepackaged Chapter 11 filing, enables the company to remove the uncertainty."
Unfortunately, the company has given little information as to when the wonderfully named "focus projects" will be over, or to assure its new shareholders and new lenders that the chronically incompetently executed CB&I project portfolio won't yet sting the company again.
Remember that McDermott lost $71 million before interest payments in the third quarter of 2019, the most recent for which public financial information is available, and burned through $114 million of cash in its operations in that three month period, as per the filing here.
Wiping out all the debt does remove the onerous interest payments which were draining cash flow. But McDermott's problem was not its level of leverage, it was the poor execution and disastrous cash burn from the projects acquired with CB&I. Unless Mr Dickson and his hot shot team of highly paid management legends are actually able to improve McDermott's LNG plant execution, this Chapter Eleven filing will not necessarily be the fresh start that the company hoped.
The business plan Alix attached in the Chapter Eleven filing shows that in 2020 the company is still expected to burn $550 million in free cash flow. The business only becomes cash generative in 2021, when a rather meagre $56 million in free cash flow is forecast on page 524 of the 619 pages in the filing.
Where the Colombian "sixteen million dollar hookers" law suit lies after the Chapter Eleven filing, I admit I have no idea.
In fact, the new shareholders are the old lenders. They never sought to own McDermott. Now they will seek as quick a recovery of their money as possible.
McDermott bought CB&I in an attempt to escape a take-over by Subsea7. CB&I's projects drove McDermott to its current parlous state. I would not be surprised if Subsea7 doesn't come knocking again to acquire McDermott's offshore engineering, procurement, installation and construction business.
With new shareholders, who just want the money from their bad loans back, I suspect the board would be much more susceptible to a Subsea7 offer now. Cash in the hand from Subsea7 would be better than waiting on what the Alix Partners business case in the SEC filing optimistically refers to as an assumption of "a robust recovery in H2 2020" on page 537.
Watch this space.
Upon the Chapter 11 filing, more information about McDermott's restructuring, including access to court documents, will be available at https://cases.primeclerk.com/McDermott
The SEC filing seems to flag that Mr Dickson will have his hand out again for another bonus, again:
"The Debtors' operations are dependent on a relatively small group of key management personnel and a highly-skilled employee base. The Debtors' recent liquidity issues and the Chapter 11 Cases have created distractions and uncertainty for key management personnel and employees. As a result, the Debtors have experienced and may continue to experience increased levels of employee attrition. Because competition for experienced personnel in the oil and natural gas industry can be significant, the Debtors may be unable to find acceptable replacements with comparable skills and experience and the loss of such key management personnel could adversely affect the Debtors' ability to operate their businesses. In addition, a loss of key personnel or material erosion of employee morale at the corporate and/or field levels could have a material adverse effect on the Debtors' ability to meet customer and counterparty expectations, thereby adversely affecting the Debtors' businesses and the results of operations."
Yeah, right!