(Bloomberg) -- McDermott International Inc. received a $650 million lifeline, though the embattled energy-industry contractor and engineer may have paid too dearly to secure the new financing.
An announcement Monday that the Houston-based company will get immediate access to a $550 million term loan and $100 million in letters of credit boosted its stock as much as 29% and sent its bonds rallying. However, the gains were quickly reversed as investors fretted about uncertainty over its free cash flow, 2019 outlook and the high interest rates for its debt.
To obtain the financing, McDermott projected free cash flow of negative $1.2 billion for this year, according to a presentation on the U.S. Securities and Exchange Commission website. That’s almost double the negative $640 million previously seen. It agreed to pay around 10% interest rates on the rescue loan, withdrew its annual guidance and said it was halting efforts to sell its industrial storage tanks business.
While the financing is a lifeline that may help McDermott avoid bankruptcy, the outlook withdrawal signals “near-term performance uncertainties or working capital challenges,” Bloomberg Intelligence analyst Scott Levine said. The company’s stock and bonds have cratered after it struggled with debt taken on from its $3.5 billion acquisition of Chicago Bridge & Iron Co. It’s also grappling with reduced spending by the oil and gas industry.
The company plans to use the new funds to finance working capital and support the issuance of performance guarantees. It also awarded retention bonuses to some top executives, including $3.4 million for Chief Executive Officer David Dickson, tied to it getting certain tranches of the credit facility.
The initial $650 million is part of a rescue financing package totaling $1.7 billion provided by some of its existing secured lenders, according to a filing Monday.
Rise and Fall
Shares of the company tumbled as much as 14%, and were down about 13% by 3:11 p.m. in New York. While its 10.625% bonds due 2024 posted the biggest gain and volume among high yield debt on Monday, they reversed that advance. They are now leading high-yield market declines, dropping 4 cents on the dollar to about 24.5 cents. The debt now yields nearly 62%.
The company said it’s still exploring a sale of its Lummus Technology unit and its pipe-fabrication business. It said last month it had received expressions of interest valuing Lummus at as much as $2.5 billion.
The company specializes in building and installing large, expensive items like oil platforms and natural gas plants. It’s currently constructing Sempra Energy’s giant Cameron liquefied natural gas complex in Louisiana. Lummus licenses technologies used in petrochemicals, refining and gas processing, and holds more than 3,100 patents.
(Updates with free cash flow details in third paragraph.)