McDermott International, Inc. – Energy Services Giant Files Prepackaged Chapter 11 with $9.2bn of Debt, Looks to Equitize $4.6bn and Have Plan Confirmed within Two Months

January 21, 2020 − McDermott International, Inc. and a plethora of affiliated Debtors (NYSE: MDR, “McDermott” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of Texas, lead case number 20-30336. The Debtors, a Houston-based energy services company, are represented by Matthew D. Cavenaugh of Jackson Walker L.L.P.. Further board-authorized engagements include (i) Kirkland & Ellis LLP as general bankruptcy counsel, (ii) Evercore Group L.L.C. as financial advisor, (iii) AP Services, LLC, an affiliate of AlixPartners, as "operational" advisor, (iv) Baker Botts L.L.P. as corporate legal counsel, (v) Arias, Fabrega & Fabrega as Panamanian legal counsel and (vi) Prime Clerk as cliams agent.

The Debtors’ lead petition noted between 50,001 and 100,000 creditors, estimated assets of $8.754.0bn and estimated liabilities of $9.863.0bn.

Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) UMB Bank, N.A. (as trustee for $1.4bn of 10.625% Notes due 2024), (ii) Greensill Capital UK Ltd ($34.8mn of working capital finance) and (iii) H Butting GMBH Co. KG ($28.1mn trade). 48 of the Debtors' top 50 unsecured creditors have claims in respect of trade payables with each of those claims being in excess of $2.0mn. The Debtors' Disclosure statement makes clear that the list of unsecureds unfurls to an extraordinary length, noting that "the Debtors has [sic] in excess of $1 billion in outstanding trade claims, a significant portion of which is substantially past due."

In a press release announcing the prepackaged filing, the McDermott advised that it “has the support of more than two-thirds of all its funded debt creditors for a restructuring transaction that will equitize nearly all the Company’s funded debt, eliminating over $4.6 billion of debt…The Company's support from all of its creditor constituencies is memorialized in a Restructuring Support Agreement. The Company plans to move swiftly toward Court approval of the Plan, with confirmation expected within approximately two months from filing.”

Restructuring Support Agreement 

On January 21, 2020, the Debtors executed a  restructuring support agreement (the "RSA") with certain stakeholders (the "Consenting Stakeholders) including holders of approximately 95% in principal of the 2021 Letter of Credit Claims, approximately 85% in principal of the 2023 Letter of Credit Claims, approximately 85% in principal of the Revolving Credit Claims, approximately 74% in principal of the Term Loan Claims, approximately [•]% in principal of the Credit Agreement Hedging Claims, approximately [•]% in principal of the Cash Secured Letter of Credit Claims and approximately 67% in principal of the Senior Notes Claims .

The key terms of the RSA include:

• an aggregate $2.81bn DIP financing package (the “DIP Facility”) provided by the Debtors’ senior secured lenders, which includes $1.2bn in new secured term loans, $543.0mn in new letter of credit capacity, and the “roll up” of the $800.0mn in superpriority term loans and $200.0mn in superpriority letters of credit;
• an agreement by the Debtors’ senior secured term lenders to substantially equitize more than $3 billion in funded debt in exchange for 94% of the equity in the Reorganized Debtors (subject to certain adjustments described in the Restructuring Support Agreement and Plan) and $500.0mn in take back senior secured exit term loans (the “Take Back Facility”);
• commitments from the Debtors’ letter of credit issuing banks to (a) allow for the renewal of existing letters of credit (on existing terms) during these chapter 11 cases, (b) provide the incremental letter of credit capacity under the DIP Facility, and (c) provide for an aggregate of up to $2.44 billion in letter of credit capacity to support the Debtors’ go-forward business on emergence from chapter 11 under three senior secured exit letter of credit facilities (collectively, together with the Take Back Facility, the “Exit Facilities”);
• the sale of the Lummus Technology Business for at least $2.725bn, as set forth in the stalking horse purchase agreement entered into by the Debtors and The Chatterjee Group and Rhone Capital as stalking horse purchaser prior to the Petition Date, the proceeds of which will be used to (a) fund a minimum $820.0mn cash balance to support the Debtors’ go-forward business and (b) repay the funded obligations under the DIP Facility;
• recovery for unsecured bondholders in form of 6% of the equity in the Reorganized Debtors (subject to certain adjustments described in the Restructuring Support Agreement and Plan), the New Warrants, and the Consenting Noteholders the ability to participate in the Rights Offering;
• repayment in full or reinstatement of all unsecured trade claims;
• assumption of all project-related executory contracts (in some instances, as amended pursuant to agreement between the Debtors and the applicable customers);
• reinstatement and assumption of unsecured bi-lateral facility letter of credit obligations and surety obligations;
• payment in full in cash of all administrative and priority claims; and
• cancellation of all existing preferred and common equity interests.

Lummus Technology ("Lummus") Sale

Certain subsidiaries of McDermott have entered into a share and asset purchase agreement (the “Agreement,” filed with the Debtors' 8-K) with a joint partnership between The Chatterjee Group and Rhône Group (the “Joint Partnership”) pursuant to which the Joint Partnership has agreed to acquire Lummus for a base purchase price of $2.725bn and to serve as a stalking-horse bidder in a section 363 auction/sale process. The Agreement further provides that McDermott will have the option to retain or purchase a 10 percent common equity ownership interest in the entity purchasing Lummus Technology and that proceeds from the Lummus sale are to be applied in the first instance to the full repayment of the DIP financing facility.

The Debtors' Disclosure Statement provides the following as to their marketing efforts and potential further bidding: "The Debtors’ commenced their formal process in late September 2019 by reaching out to potential financial and strategic purchasers. The Debtors received initial indications at or above $2.5 billion."

NYSE Delisting

As a result of the Chapter 11 filing, McDermott expects to be shortly delisted from the New York Stock Exchange and McDermott common stock will continue to trade
in the over-the-counter marketplace throughout the pendency of the Chapter 11 process. The Debtors warn, however, that its "shares are proposed to be cancelled as part of McDermott’s restructuring."

DIP and Exit Financing

The Debtors also announced that they had lined up a $2.81bn debtor-in-possession (“DIP”) financing facility to be comprised of (i) $1.2bn in new secured term loans, (ii) $543.0mn in new letter of credit capacity (iii) and the “roll up” of the $800.0mn in superpriority term loans and $200 million in superpriority letters of credit.

The Company also has secured committed exit financing of over $2.4bn in the form of a letter of credit facility and will emerge from Chapter 11 with approximately $500 million in funded debt. 

Summary of classes, claims, voting rights, and projected recoveries (defined terms are as defined in the Plan and/or Disclosure Statement)

• Class 1 (“Other Secured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The estimated aggregate amount of claims is TBD and estimated recovery is 100%.
• Class 2 (“Other Priority Claims Unimpaired”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The estimated aggregate amount of claims is TBD and estimated recovery is 100%.
• Class 3 (“Other Prepetition Financing Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The estimated aggregate amount of claims is $105.0mn and estimated recovery is 100%
• Class 4 (“Bilateral Facility Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan.The estimated aggregate amount of claims is $1.154bn and estimated recovery is 100%.
• Class 5 (“2021 Letter of Credit Claims”) is impaired and entitled to vote on the Plan.The estimated aggregate amount of claims is $229.0mn and estimated recovery is 100%.
• Class 6A (“2023 Letter of Credit Claims”) is impaired and entitled to vote on the Plan. The estimated aggregate amount of claims is $1.259bn and estimated recovery is 100%.
• Class 6B (“Revolving Credit Claims”) is impaired and entitled to vote on the Plan. The estimated aggregate amount of claims is $998.0mn and estimated recovery is 84%.
• Class 6C (“Term Loan Claims”) and is impaired and entitled to vote on the Plan. The estimated aggregate amount of claims is $2.229bn and estimated recovery is 84%.
• Class 6D (“Credit Agreement Hedging Claims”) is impaired and entitled to vote on the Plan. The estimated aggregate amount of claims is $50.0mn and estimated recovery is 84%.
• Class 7 (“Cash Secured Letter of Credit Claims”) is impaired and entitled to vote on the Plan. The estimated aggregate amount of claims is $305.0mn and estimated recovery is 100%.
• Class 8 (“Lloyds Letter of Credit Claims”) is impaired and entitled to vote on the Plan. The estimated aggregate amount of claims is $102.0mn and estimated recovery is 100%.
• Class 9 (“Senior Notes Claims”) is impaired and entitled to vote on the Plan. The estimated aggregate amount of claims is $1.402bn and estimated recovery is 19%.
• Class 10 (“General Unsecured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The estimated aggregate amount of claims is TBD and estimated recovery is 100%
• Class 11 (“Intercompany Claims”) is unimpaired/impaired, deemed to accept/reject and not entitled to vote on the Plan. The estimated aggregate amount of claims is NA and estimated recovery is 0-100%
• Class 12 (“Existing Equity Interests Other Than in McDermott”) is unimpaired/impaired, deemed to accept/reject and not entitled to vote on the Plan. The estimated aggregate amount of claims is NA and estimated recovery is 0-100%
• Class 13 (“Existing Preferred Equity Interests in McDermott”) is impaired, deemed to reject and not entitled to vote on the Plan. The estimated aggregate amount of claims is NA and estimated recovery is 0%.
• Class 14 (“Existing Common Equity Interests in McDermott”) is impaired, deemed to reject and not entitled to vote on the Plan. The estimated aggregate amount of claims is NA and estimated recovery is 0%.

Pre-Petition Debt

As of January 21st, the Debtors have approximately $5.12bn in aggregate outstanding secured and unsecured funded debt obligations, approximately $3.44bn in aggregate outstanding unfunded secured and unsecured letter of credit obligations, and approximately $588.0mn in aggregate surety-related obligations, including the following: 

In addition, MDR has outstanding preferred equity with a stated aggregate liquidation preference of approximately $330.0mn. 

Events Leading to the Chapter 11 Filing

The Debtors' Disclosure Statement details the events leading to the Debtors’ Chapter 11 filing. The Disclosure Statement provides: "In May 2018, McDermott acquired CB&I, a downstream provider of onshore petrochemical, refining, power, gasification, and gas processing technology, through the Combination. 

Unfortunately, after the Combination certain of the legacy CB&I projects required unanticipated levels of cash support to cover losses. Two of those projects in particular, the Cameron LNG export facility project in Hackberry, Louisiana, and the Freeport LNG export facility project in Freeport, Texas have used substantial amounts of cash in the past year, straining McDermott’s liquidity and capital resources. 

At the same time the Debtors were working to address these loss projects, the Debtors were winning new projects at a high rate—as reflected in McDermott’s record project backlog, which now exceeds $19 billion. With this success, though, came increased near term financial obligations. Each of these projects will require new letters of credit to support the Debtors’ performance obligations under the applicable project contracts and major front-end investment in engineering and fabrication, among other things. Furthermore, many of McDermott’s projects have substantial working capital requirements as significant cash flows are often only realized towards the end of the project lifecycle. This only exacerbated the Debtors’ already tight liquidity position. 

McDermott’s legacy business, providing technology, engineering and construction, and fabrication services for some of the most complex energy projects in the world, comes with a degree of financial risk that is typically assessed at the outset, and throughout the lifecycle of, a project. Post-Combination, certain legacy projects resulted in significant cost over-runs. The impact of these cost over-runs was then exacerbated by an incrementally slowing pace of new contract awards, an effect felt across the industry, and the fact that returns on these projects will not be realized until project completion. 

…iin addition to front-end capital investment, each of the Debtors’ projects will require new letters of credit to support the Debtors’ performance obligations under the applicable project contracts. As of the date hereof, the Debtors had reached the limit of their existing letter of credit capacity and, absent a substantial deleveraging, were unlikely to be able to secure access to new letters of credit on any terms, much less favorable terms. Moreover, as a result of the Debtors’ financial condition, their vendor base became increasingly stretched—as of the date of this Disclosure Statement, the Debtors has in excess of $1 billion in outstanding trade claims, a significant portion of which is substantially past due. Ultimately the Debtors determined that they needed a broader capital structure solution to facilitate the increased future credit support and normalize trade terms that will ultimately allow the Debtors to capitalize on their record backlog."

Further Engagements

Davis Polk & Wardwell LLP is serving as legal counsel to the Term Loan Lenders, Centerview Partners LLC is serving as financial advisor to the Term Loan Lenders, Barclays is serving as agent to the Term Loan Lenders and Latham & Watkins LLP is serving as legal counsel to the agent to the Term Loan Lenders.

Linklaters LLP is serving as legal counsel to the Revolving Lenders, Crédit Agricole Corporate and Investment Bank is serving as agent to the Revolving Lenders, Bracewell LLP is serving as legal counsel to the agent to the Revolving Lenders and FTI Consulting is serving as financial advisor to the agent to the Revolving Lenders.

Paul, Weiss, Rifkind, Wharton & Garrison LLP and Brown Rudnick LLP are serving as legal counsel to the bondholders, Houlihan Lokey, Inc. is serving as financial advisor to the bondholders.

About the Debtors

McDermott  is a Houston, Texas-based services company for the onshore-offshore energy industry and a leading provider of integrated engineering, procurement, construction and installation (“EPCI”), front-end engineering and design, module fabrication services, and technology to offshore, subsea, power, liquefied natural gas (“LNG”), downstream energy projects, and upstream field developments worldwide. As of the date of this Disclosure Statement, the Company operates in approximately 54 countries, has over 42,000 employees and independent contractors, and owns a diversified fleet of specialty marine construction vessels and fabrication facilities.

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