Moody's rates McDermott notes B3

Moody's Investors Service said it assigned a B3 rating to the 10-year $200 million senior secured notes to be issued by J. Ray McDermott S.A. The outlook remains negative.

The B3 rating reflects the company's recent, and fairly long history, of entering into long-term fixed price contracts that often leave the company exposed to risks that lead to eroding profit margins and/or losses, and McDermott's current lack of liquidity and very weak financial performance, driven primarily by losses related to three large EPIC Spar projects and a project in Argentina. The rating also reflects the primary use of proceeds from the proposed note offering, which is to fund expected negative operating cash flow into 2004 that will likely range between $110 million and $135 million.

Moody's said it has decided not to notch the proposed notes up from the senior implied rating due largely to McDermott's projected capital structure, which will effectively consist of all secured debt as well as the relatively illiquid nature of the collateral supporting the notes and the coverage provided therein.

Moody's also noted McDermott's ability to issue up to $50 million of additional senior secured notes that would share the same collateral package as the proposed notes.

Aside from the proceeds from the proposed notes and cash on hand, McDermott's only other current source of liquidity is its secured bank credit facility, which is shared with BWX Technologies Inc.

Under McDermott's and BWX Technologies' current credit facility, McDermott has sublimits of $100 million for letters of credit and $10 million for cash advances. This $166.5 million credit facility matures in April 2004, and McDermott intends to replace this facility with a new letter of credit facility secured by accounts receivables, available only to McDermott.

Moody's said the new facility is expected to provide ample letter of credit availability to accommodate McDermott's projected increase in activity levels over the medium term.

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