McDermott’s capital structure took a nosedive after the issuer’s 2Q19 earnings report yesterday underscored the fragility of its turnaround effort and sparked concerns about liquidity and free cash flow, said six sources following the company.

About a year after the construction services provider’s acquisition of Chicago Bridge & Iron Company (CB&I) — a company wracked by cost overruns that in part led it to seek a buyer — CB&I’s legacy projects continue to haunt McDermott’s performance, the sources said. In its second-quarter report, the litany of affronts included missing EBITDA expectations by nearly half, slashing full-year guidance, revealing new writedowns and unveiling disappointing asset sale proceeds, they said.

On the heels of the post-close earnings report yesterday, McDermott’s USD 1.3bn 10.625% senior unsecured notes due 2024 fell as low as 74.938 to yield 18.816% this morning from trades at 95.5 to yield 11.881% yesterday (29 July) before the earnings report, according to MarketAxess. The notes retraced a few points this afternoon to change hands most recently at 78.5 yielding 17.45%.

The USD 2.23bn Libor+ 500bps TLB due 2025 is now quoted in the 92.458/93.875 context, from 96.833/98.333 yesterday and levels bracketing par on Friday (26 July), according to Markit.

McDermott’s stock plummeted 37% to USD 6.38 per share today for a market cap of USD 1.154bn.

The capital structure was placed in mid-2018 to fund the CB&I acquisition. The financing faced investor scrutiny and went through several rounds of changes during syndication due to CB&I’s history of cost overruns on major projects, which in 2017 had led to advisor hires by the company and a lender group amid covenant negotiations.

For McDermott’s 2Q19, it missed investor expectations for adjusted EBITDA by 45%, reporting USD 112m versus forecasts of around USD 205m, two of the sources said.

The company also announced writedowns of USD 30m at its Freeport LNG project (former CB&I) and USD 33m at an offshore project for Pemex in the Gulf of Mexico.

“The writedowns are worrisome. Several investors advised the company to not buy the CB&I assets,” one of the sources said. (At least one shareholder came out publicly against the deal.) “[CB&I] bid too low for the contracts and now, [McDermott is] facing the danger of cost overruns, just like before they bought the assets.”

McDermott also cut guidance for 2019 adjusted EBITDA to USD 725m from its USD 1.1bn forecast as of 1Q19. It cited the weak second quarter, as well as USD 500m of revenue slippage from 2019 into 2020 across the portfolio and lower margin expectations for its North, Central and South America segment, which includes the legacy CB&I assets.

The company expects to burn USD 640m of cash in 2019, given negative USD 495m of cash from operations less USD 145m of capex. Three months ago, the company expected a cash burn of USD 470m, based on negative USD 310m of cash from operations less USD 160m of capex.

Liquidity at quarter-end totaled USD 1.024bn through USD 455m of cash and USD 569m of revolver availability. The company now also expects a loss of USD 32 cents per share for the year, compared to expectations for a profit of USD 1.65 per share three months ago.

On the asset sale front, sources are now uncertain if McDermott will meet its target of USD 1bn in net proceeds from the sale of its pipe fabrication and storage tank businesses. During the quarter, McDermott sold its Alloy Piping Products business, the distribution and manufacturing arm of the pipe fabrication business, for USD 83m in net proceeds, much lower than expected, according to three of the sources.

The company is still pursuing the sale of the rest of its pipe fabrication business and storage tank business.

“This is a black box,” one of the sources said.

As of 30 June, the company is levered 4.9x through the first lien and 7.4x total, based on USD 529m of LTM adjusted EBITDA, USD 2.6bn in first lien debt and USD 3.9bn of total debt. Under prior guidance for the massive EBITDA jump to USD 1.1bn, leverage at year-end would have been 3.55x, while the new guidance implies 5.4x.

McDermott did not respond to a request for comment.

2019 Debtwire