McDermott International Inc. Downgraded On Greater-Than-Expected Project Losses; Outlook Negative

McDermott International Inc.'s 2018 performance was weaker than we had 
previously expected due to additional charges on its Cameron and Freeport LNG 
projects, its Calpine power project, and several other negative operating 
items during the fourth quarter. We anticipate 2019 free operating cash flow 
will be lower than previously assumed and significantly negative.
On March 6, 2019, S&P Global Ratings lowered its issuer credit rating on 
McDermott to 'B' from 'B+'. 
At the same time, we lowered our issue-level ratings on McDermott's senior 
secured term loan to 'B+' from 'BB-' and its unsecured debt to 'CCC+' from 
'B-'.
The negative rating outlook reflects our view that we could lower the rating 
further if operating performance does not improve, cash outflows are worse 
than we currently expect, or proposed asset sales are not successfully 
completed.


NEW YORK (S&P Global Ratings) March 6, 2019—S&P Global Ratings today took the 
above listed rating actions. The downgrade reflects weaker-than-expected 2018 
earnings due to greater-than-expected losses on McDermott International Inc.'s 
Cameron LNG, Freeport LNG, and Calpine gas power projects, as well as other 
projects. The company changed its estimates for the Cameron project due to 
lower-than-expected labor productivity and higher subcontract, commissioning, 
and construction management costs. On the Freeport project, loss expectations 
increased because the company lowered its estimate of claim proceeds 
associated with damages from Hurricane Harvey in 2018. We now expect free 
operating cash flow (FOCF) to be significantly negative in 2019. Weak 
operating performance will likely persist in the first quarter but improve in 
the second half of the year. As such, we anticipate the negative cash flow 
from the three projects mentioned above will reduce throughout the year.


The negative outlook on McDermott reflects our expectation for significant 
cash outflows in 2019 following a number of changes to loss estimates on 
several of its projects.


We could lower our rating on McDermott if its FOCF does not improve over the 
next 12 months, such that 2019 cash outflows are greater than we currently 
expect or 2020 cash flows remain negative. This could occur if, for example, 
the company incurs greater-than-expected project losses. Additionally, we 
could lower our rating if the company encounters unexpected integration 
challenges or cannot successfully execute its asset sales or if proceeds and 
debt reduction are much lower than we expect.


We could revise our outlook to stable if FOCF to adjusted debt improves 
significantly and averages close to 5%. This could occur if the company 
executes its contracts without any further major cost overruns or project 
losses, using proceeds from pending asset sales to repay debt balances.