McDermott International Inc. Downgraded To 'CCC' On Hiring External Advisors; Ratings Placed On CreditWatch Developing

  • Following several quarters of underperformance, Houston-based engineering and construction provider McDermott International Inc. announced that it routinely hires external advisors to evaluate opportunities, which could include changes to its capital structure.
  • We are lowering our issuer credit rating on McDermott to 'CCC' from 'B-', which reflects our view of the increasing risk that the company could elect to engage in a transaction that we would view as a distressed exchange.
  • At the same time, we lowered our issue-level ratings on McDermott's senior secured term loan to 'CCC+' from 'B' and its unsecured debt to 'CC' from 'CCC'.
  • We are placing the issuer credit and issue-level ratings on CreditWatch with developing implications to reflect the potential for a higher or lower rating on McDermott depending on the outcome of its engagement with external advisors, which could result in asset sales and changes to its capital structure and balance sheet, including the possibility of a distressed exchange.
NEW YORK (S&P Global Ratings) Sept. 20, 2019—S&P Global Ratings today took the rating actions listed above. The downgrade and CreditWatch placement follows McDermott's announcement that it routinely hires external advisors to evaluate opportunities for the company, which could include changes to its capital structure. This follows several quarters of weaker than previously expected operating performance and cash flow. We believe this increases the likelihood the company could engage in a transaction we would view as a distressed exchange, where holders of the company's debt could receive less than the original promised value. Such an exchange would help alleviate the high debt burden on the company. Although McDermott doesn't face meaningful near-term debt maturities, we view the capital structure as unsustainable in the long term, with about negative $600 million of free cash flow in 2019.
The CreditWatch with developing implications reflects the potential for a higher or lower rating on McDermott depending on the outcome of its engagement with external advisors, which could result in asset sales and changes to its capital structure and balance sheet, including the possibility of a distressed exchange.
We could lower the rating on McDermott if the company announced a debt exchange or engaged in discounted principal buybacks at less than par value. We could also lower the rating if liquidity deteriorated to the point that we believe that the company has less than six months of liquidity sources left to cover its fixed charges or is at risk of breaching its covenants.
We could raise the ratings on McDermott if free operating cash flow (FOCF) to adjusted debt improves toward breakeven levels and the company's liquidity cushion improves. This could occur if the company executes its contracts without any further major cost overruns or project losses, along with proceeds from pending asset sales to bolster liquidity. Under this scenario, we assume a decreased likelihood of a distressed debt exchange.
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