April 24, 2018 / 6:17 PM / 2 years ago

McDermott loan slides as investors digest Subsea 7’s hostile bid

(LPC) - U.S. engineering firm McDermott’s US$2.26bn term loan fell in the secondary loan market on Tuesday after a US$2bn unsolicited bid from offshore oil services firm Subsea 7 threatened to break up McDermott’s agreed bid for onshore engineering firm Chicago Bridge & Iron (CB&I).

McDermott’s term loan finances its planned acquisition of CB&I and will be repaid if the deal falls through. It was quoted at 99-99.5 on Tuesday, down from a 100-100.25 market on Friday before Subsea 7’s bid, sources said.

The loan fell on the news. “We’ve got some sellers,” a loan trader said.

Shareholders of McDermott and CB&I are set to vote on the merger on May 2. Subsea 7 said McDermott’s board had rejected its proposal on April 20, but also said that it could raise its offer.

McDermott’s loan is currently in escrow, pending the outcome of its bid. While that deal would disappear if Subsea 7’s bid succeeds, it would be a credit positive transaction for McDermott, said Michael Corelli, senior credit officer at Moody’s Investors Service.

“It would be a bigger company and somewhat diversified. The credit metrics would be very strong for a B1 rating,” he said. “Subsea definitely seemed interested here. The reason that they went public with this bid was to put it in the mind of McDermott’s shareholders before they vote on the CB&I deal.”

When McDermott’s term loan was syndicated, the discount was widened twice and pricing was also increased after investors pushed back on concerns about CB&I’s negative operating cash flows.

“The biggest concern was the CB&I and the problem projects they’ve had there,” Corelli said. “They had four projects where they had larger than expected cost and charges, and led to them having some significantly negative operating cash flows. The debt investors who made McDermott pay more in interest were concerned about the cash burns and the potential continued losses.”

The term loan was priced at 500bp over Libor with a 1% floor and 98 original issue discount, versus  initial guidance of 400bp-425bp over Libor range and a 99.5 discount, Reuters LPC previously reported.

McDermott reported quarterly earnings on Tuesday, beating Thomson Reuters I/B/E/S mean estimate. The company posted first quarter earnings of US$0.17, net income of US$0.17 per share, an increase from last year’s same quarter when the company earned $0.08.

McDermott did not comment beyond confirming it had rejected Subsea 7’s bid.

“Given the attributes of the proposed transaction and our stated ability to further enhance our proposed terms, we encourage the McDermott Board of Directors to reconsider this compelling opportunity to combine two complementary businesses,” Jean Cahuzac, Subsea 7’s chief executive officer, said in a press release.

Editing by Tessa Walsh

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