McDermott Debt May be Prelude to a Bankruptcy Loan

McDermott International Inc.’s $1.7 billion super-senior credit facility could give an indication of terms if the struggling engineering and construction firm were to convert the debt into a bankruptcy loan.

The facility consists of a $1.3 billion term loan and $400 million in letters of credit. It contains highly restrictive covenants that could provide a template for the kind of terms they would receive if they were to convert their debt into a debtor-in-possession loan in bankruptcy, Valerie Potenza, a high-yield analyst at Xtract Research, said in an interview.

“It looks like a DIP, talks like a DIP, but it’s not a DIP,” she said.

A representative for McDermott didn’t immediately respond to a request for comment.

McDermott skipped a Nov. 1 interest payment on its bonds, triggering a 30-day grace period to make the payment or file for Chapter 11. It also warned in regulatory documents of the risk of bankruptcy.

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The company last month managed to negotiate the $1.7 billion rescue financing, but it faces numerous hurdles to access the roughly $1.1 billion available across three tranches after its initial $650 million draw.

The super-senior facility contains DIP-like lender protections, such as a limit on its ability to take on new debt, according to Potenza. If the company were to end up filing for bankruptcy, it’s reasonable to assume that the existing group of lenders would negotiate with the company to provide a restructuring loan, she said.

Regardless of McDermott’s fate, the lenders are being well-compensated for taking the risk of lending to the company, which provides services to oil and gas companies. If McDermott succeeds in selling its Lummus Technology unit, the super-senior lenders will receive their par value plus a 3% premium, according to Xtract’s analysis of the credit agreement.

In the event of a bankruptcy filing in the next 18 months, McDermott must repay the loan before other payments, even if a Chapter 11 is triggered by insolvency. Those lenders would receive a make-whole premium in the first six months and a 3% premium for the 12 months thereafter, according to Xtract.


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