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McDermott Int'l (MDR) Downgraded to 'B+' by S&P; Sees Longer Time to Reduce Debt Leverage

November 26, 2014 2:05 PM EST

Standard & Poor's Ratings Services today said it lowered its corporate credit rating on Houston-based McDermott International Inc. (McDermott) (NYSE: MDR) to 'B+' from 'BB-'. The rating outlook is stable.

At the same time, we lowered the issue-level ratings on the company's $400 million senior secured LOC facility and $300 million senior secured first-lien term loan to 'BB' from 'BB+'. The recovery ratings on the first-lien facilities remains '1', indicating our expectation for very high (90%-100%) recovery in the event of a payment default.

In addition, we lowered the issue-level rating on the company's $500 million second-lien notes to 'BB-' from 'BB'. The recovery rating on the notes remains '2', indicating our expectation for substantial (70%-90%) recovery in the event of a payment default.

"The downgrade reflects our view that a rebound in McDermott's operating cash flows and decline in debt leverage to below 4x will likely take longer, with some projects booking slower than we previously anticipated," said Standard & Poor's credit analyst Robyn Shapiro.

However, we note the company's progress on the turnaround of its operating performance; it has reduced the number of loss projects in backlog to four from nine as well as improved financial results, including decelerating cash outflows in the third quarter of 2014.

The rating on McDermott reflects the inherent cyclicality of the E&C services sector and McDermott's niche service offerings in the competitive offshore oil and gas market. During 2013, the company recorded an operating loss of $465 million, a result of a combination of operational matters and commercial issues with customers that affected the company's estimates of costs at completion for various projects.

The outlook is stable. We expect operating performance to improve in 2015 relative to 2014. Given McDermott's current capital expenditure plans, we expect free operating cash flow to remain negative during the next two years. However, we expect cash flow from operations to be positive in 2015.

We could lower the rating in the next year if operating performance fails to improve as expected and cash from operations does not remain positive for the full year 2015. Additionally, we could lower the rating if liquidity deteriorates, due to a covenant violation for example. This could occur if the company experiences delays or underperforms on a number of contracts in 2015.

We could raise the rating in the next year if the company is able to execute its business improvement initiatives and stabilize and improve profitability and operating performance. We would expect liquidity to improve to "adequate," with at least 15% headroom under financial covenants, with a path to achieve debt to EBITDA less than 4x, as well as positive cash from operations.



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