Do you work for McDermott International Inc.? If so, you probably haven't seen a pay rise in many years. You will have seen many hard working and honest colleagues laid off for the offshore construction company. What you are about to read may make you very angry.
Are you a supplier for McDermott, wondering why your invoices are taking longer to be paid? Prepare to be disappointed. Are you a McDermott shareholder? You should be turning up to voice your protest at the next annual general meeting and you should be pressing the board for an explanation of their executive pay policy.
As we have covered here in July, McDermott has faced significant financial issues following the disastrous acquisition of Chicago Bridge and Iron Company (CB&I) in 2018, including allegations that CB&I expensed sex workers' fees to a refinery project, a US$4.5 billion lawsuit from its aggrieved Colombian customer, and the forecast that CB&I's loss making portfolio of downstream projects would consume more than $400 million in cash in 2019.
The company paid out $300 million in fees to investment bankers on the deal, and then needed to borrow $289 million at 12 per cent interest rates to fend off an imminent cash crunch (for the avoidance of doubt, all dollars cited are US dollars).
After such a monumental mess up, you might have thought that McDermott CEO David Dickson would be at risk of losing his job. But, no, as McDermott finds its financial situation getting worse and worse, so Mr Dickson's personal financial outlook just gets better and better.
We have already examined how the disastrous Ocean Rig acquisition and a $2 billion loss at Transocean resulted in a bumper payday for its CEO Jeremy Thigpen, and how the former Gulfmark CEO and the former Tidewater CEO managed to turn their companies' bankruptcies into a personal bonanza.
Mr Dickson and his cronies in the c-suite at McDermott have managed to outdo even Transocean and Tidewater's leaders in their ability to reward themselves for their mistakes.
On Monday, McDermott announced that had made another mistake, and was adjusting the forecasted cash burn for 2019 from the $400 million that we reported in July to a whopping $1.2 billion.
Once again, the CB&I project portfolio threatens to destroy the company. Once again, the company needs to raise emergency funding to avoid breaching its covenants. You might have thought that suddenly realising less than three months from the end of the year that you been out on your cash flow forecast by hundreds of millions of dollars might be the kind of mistake that would cost you your job. You would be wrong.
McDermott declared it had signed a $1.7 billion funding package, and on October 21, the company issued a statement saying that it had received the initial $550 million term loan from a consortium headed by Barclays, and $100 million in letters of credit "to help stabilise its business and ward off bankruptcy". You can read the full text here.
Buried in the detail was the news that as part of the terms of the emergency loan, the company's senior management had been awarded "retention bonuses". Quite where this bunch of executive losers would go if they weren't paid the bonus is not clear.
I don't think there is much of a job market for chief executives who make bad acquisitions which lead their companies to the brink of a Chapter Eleven filing, or for CFOs who are so monumentally hopeless at their jobs that their operating cash flow projections are completely wrong (and not in a good way).
I doubt Technip, Saipem or Subsea7 will be rushing to poach Mr Dickson from the ruins of McDermott with a golden handshake and the keys to the corner office, but I suppose that I could be wrong.
These cash bonuses were approved by the McDermott Board, with Mr Dickson raking in $3.375 million, whilst Samik Mukherjee, Group Senior Vice President, Projects will receive $1.4 million, and Stuart Spence, the CFO, a mere $1.3 million. Two other senior managers received lesser bonuses.
One third of the bonuses were paid immediately on the first payment from the financiers, with the second third to follow on the release of the second payment of the loan, and the final payment when the third tranche is paid to the company.
Unfortunately, it is not all plan sailing for the heroes of Houston to claim the next wad of cash. McDermott needs 95 per cent of its unsecured bondholders to agree to swap into new payment-in-kind (PIK) notes if it wants to be able to access the next $250 million of financing.
These PIK notes would allow McDermott to defer interest payments to the bondholders. It is not clear that the bondholders will give their consent. The 2024 notes are currently trading hands at just over 24 cents on the dollar and yield 60 per cent, which tells us that the market believes there is a high risk of default by McDermott.
The 10 per cent interest rate on the new funding looks extremely onerous. As well as paying the interest, the Credit Agreement Amendment of October 21 also modifies the participation fee McDermott is charged for newly issued letters of credit, or with respect to the increased amount of existing letters of credit, to five per cent, and the company committed to issuing 27 million new shares to the new lenders.
So, Barclays and its partners receive punitively high rates of interest, they receive millions in fees, and they receive a slug of equity in the company giving them 15 per cent of the shares. This tells us how desperate McDermott is for the funding, and how precarious its financial situation is. The emergency loan will saddle the company with an additional $200 million in fees and debt service requirements this year alone, more than the forecast EDITDA, analysts report.
There is one hope for McDermott to buy itself more time to sort out the CB&I mess and pay back the bridging loan. Amid the trashcan of CB&I's shocking projects lies one possible diamond, Lummus Technology.
Lummus is a unit of McDermott that licenses technologies used in petrochemicals, refining and gas processing, and the company holds more than 3,100 patents, according to the company. Last month McDermott reported that it had received expressions of interest valuing Lummus at as much as $2.5 billion. No details were given on what basis that expression of interest was made.
Since then, there has been no information in public filings regarding who the potential buyers of Lummus might be, where the sale negotiations have reached, and what final price the buyers might pay if they do go ahead and buy Lummus.
As we have seen with MMA Offshore and its Australian supply base sale, companies which are financially precarious often struggle to maximise the value from their best assets simply because they don't have the time to negotiate hard. The buyers can smell blood and if they have cash, they can strike a hard bargain selling a lifebuoy to a drowning man.
If David Dickson is able to sell Lummus for upwards of two billion dollars, then he probably deserves a bonus. But to pay out $7 million to management simply for staying around whilst Barclays and its partners provides a hugely expensive bridging loan is ludicrous.
At the very bottom of the announcement came the kicker. The appointment of John R. Castellano, who is Managing Director at AlixPartners LLP, to act as McDermott's "Chief Transformation Officer". What does Alix Partners do? One of its fortés is that it specialises in corporate restructuring before, during, and after, bankruptcy.
Of course, there was no information on Mr Castellano's pay and conditions. But you can be sure he won't be working for free. And you can bet that kicking out the deadwood c-suite will be part of the Transformation if McDermott fails to sell Lummus and ends up in further distress.
The sooner those receiving retention bonuses are let go, the better for all in McDermott. If they had any shame, they wouldn't be receiving them anyway after they have placed the company in such jeopardy.