McDermott bonds dive on fallout from performance of legacy CB&I projects

McDermott bonds tumbled this week after its 3Q18 earnings report highlighted continuing cost overruns and escalating cash burn related to projects at recently acquired Chicago Bridge and Iron (CB&I), said three buysiders. The likelihood that the troubled legacy CB&I projects would be a drag on McDermott already made for a challenging syndication of the USD 6bn buyout financing in March of this year – and results for the first full quarter after the deal closed show the prescience of those concerns.

McDermott’s USD 1.3bn 10.625% bonds due 2024 traded today at low as 90 – recovering to 91.625 yielding 12.8% – compared to trades at par before Tuesday (30 October) evening’s earnings report, according to MarketAxess. Quotes on its USD 2.26bn Libor+ 500bps TL due 2025 dropped almost 2 points to the 98.575/99.275 context from 100.1/100.5, according to Markit.

During the Barclays-led syndication in 1Q18, CB&I’s history of cost overruns and mismanaged projects forced several rounds of structural and pricing changes. The USD 1.3bn 10.625% notes ultimately priced at 94.75 to yield 11.875%, compared to official price talk of 10.5% and initial whispers in the mid-to-high 8% area.

“The problems are concentrated in CB&I, not McDermott. Their own stuff seems okay,” a buysider said. “The acquisition didn’t work out. They made a mistake. That said, they do have a good management team and they’re doing everything they can do,” he added.

The industrial and infrastructure services provider reported a total of USD 744m in changes in cost estimates for its Cameron LNG (194m), Freeport LNG (USD 194m) and Calpine gas power (USD 68m) projects.

For 3Q18, McDermott burned USD 240m of cash, several sources estimated. That’s based on negative USD 221m of cash from operating activities less USD 19m of capex, attributed to the increased costs of the Cameron, Freeport and Calpine projects.

Of that cash burn, the company credited USD 160m to the three projects and the remaining cash burn to cash advances for onshore projects.

The company expects to burn USD 284m in cash in 4Q18, bringing 2H18 estimates to USD 520m-540m of negative cash flow from operations and negative USD 580m-USD 600m of free cash flow, the company said. On the positive side, the company expects breakeven cash flow in 1H19 and positive free cash flow in 2H19.

Adjusted EBITDA increased 77% year-over-year to USD 275m from USD 155m, while revenue grew 139% year-over-year to USD 2.289bn from USD 959m, thanks to the inclusion of CB&I into McDermott’s results starting in May of this year.

On an LTM basis, McDermott generated USD 274m of free cash flow, based on USD 666m of adjusted EBITDA, USD 308m of interest expense and USD 84m in capex.

At quarter end, liquidity totaled USD 1.4bn, including USD 580m of cash and USD 858m of availability on its USD 1bn revolver due 2023.

The company announced yesterday that it has raised USD 300m in preferred equity and USD 230m of letters of credit to fund working capital requirements and other general corporate purposes, according to company documents. McDermott also intends to divest its storage tank and US pipe fabrication businesses for an expected USD 1bn or more, with proceeds to pay down the term loan.

McDermott’s stock also plummeted 46% to trade as low as USD 6.97 yesterday, but recovered to trade at USD 8.85 today for a market cap of 1.6bn.

A McDermott spokesperson declined to comment.

2018 Debtwire

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