McDermott warns of "substantial risks" to noteholders, ability to continue

New York, Nov. 5 - McDermott International, Inc. warned Monday that its McDermott Inc. unit's lack of liquidity and level of debt pose a "substantial" risk to holders of its debt securities and to the company's ability to continue as a going concern.

At present, the McDermott Inc. does not have enough cash and other liquid resources to repay its $225 million of 9 3/8% notes when they mature on March 15, 2002, McDermott International warned in a filing with the Securities and Exchange Commission.

However, the New Orleans, La. company said it generated "a significant amount of cash flow" in its June and September 2001 quarters "which gives us some confidence that our fourth quarter cash flow from operations will also be positive." Net income was $19.3 million in the September quarter and operating activities generated $64.6 million of cash for the first three quarters of the year.

The company also sold McDermott Engineers & Constructors (Canada) Ltd. on Oct. 29, 2001, generating additional cash that may be used to pay down debt.

In addition, McDermott said: "We are also exploring other alternatives including further asset sales, early bond redemptions and potential refinancing or extension of these notes."

A key issue will be the outcome of litigation involving McDermott's corporate reorganization completed in the fiscal year ended March 31, 1999.

"If the action in this litigation is decided against us by the Bankruptcy Court, it could have a material adverse effect on (McDermott Inc.'s) ability to satisfy, extend or refinance these note," the company said in the SEC filing.

McDermott Inc. also has an inter-company stock purchase and sale agreement with McDermott International which, for the 2001 year, would generate $249.637 million for McDermott Inc. less a tax liability of $87.338 million.

McDermott Inc. "does not currently intend to exercise its right to sell" under the inter-company agreement although it may do so in the future, according to the SEC filing.

If extension or refinancing alternatives do not materialize, exercising all or part of its rights under the inter-company agreement would be one option for McDermott Inc., along with selling all or part of one or more of its operating units, requesting a capital contribution or loan from McDermott International or some combination of the alternatives.

McDermott Inc. is also facing an increased cost of capital as a result of a downgrade of its credit rating to Ba3 from B2 by Moody's Investors Service in September. McDermott Inc. said the action could also affect its access to capital. Standard & Poor's rates the company B.

In the first quarter of 2001, McDermott's two surety companies said they were no longer willing to issue bonds. The company is currently looking for alternative coverage in the surety market; in the meantime it has been covering most of its needs with letters of credit and enhanced contract terms and conditions.

"However, if we fail to obtain replacement bonding capacity, our ability to secure customer contracts and pursue additional projects in the future may be materially adversely affected," McDermott said in the SEC filing.

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