A bid by engineering giant McDermott International to avoid paying ~$2bn in arbitration claims via a UK Restructuring Plan started at the High Court today, in what is arguably the biggest and most costly case of its kind so far.
The company faces having to make $2.2bn of cash collateral payments next month, and is trying to cram down the damages claimants into the Part 26A Plan so it can extend $2.7bn of existing debt maturities and obtain more breathing space from lenders to stage a post-COVID recovery.
The six-day contested sanction hearing is the longest for a UK Plan since the tool was introduced 3.5 years ago, reflecting the amount of money at stake, the volume of opposing evidence filed, and arguments about the cross-border restructuring process.
The sole challenger is Reficar, the operator of a refinery in Colombia, which last year was awarded ~$1.3bn arbitration damages relating to unfair cost overruns against McDermott as the plant builder. The state of Colombia has also hit McDermott with $700mn of related damages, and both awards would be released under the Plan, in return for token cash compensation.
Reficar’s main dispute is in relation to McDermott’s relevant alternative if the Plan is not approved – what it describes as a “catastrophic failure” and collapse into insolvency. Reficar says this is not correct, as McDermott recently made an out-of-court offer of $50mn equity-type consideration to Reficar in a bid to bring it on board with the Plan proceedings.
Liquidity issues, and $152mn of advisory fees
Reficar argues the offer means that another outcome other than insolvency is therefore possible, should the Plan not be approved by the court. McDermott’s relevant alternative is therefore not valid and the Plan cannot be sanctioned, the refinery operator says.
According to court documents, McDermott offered Reficar the $50mn of equity-like instruments pari passu with preferred equity in a December letter, on the condition that the Plan remains the same and the refinery operator gets behind it.
In court today, Reficar said it is prepared to accept an equity interest in McDermott in return for not enforcing the ICC award. Reficar’s counsel Tom Sprange KC said that as a result the equity offer is “a matter of size, not principle”.
During cross-examination this morning, McDermott CFO Travis Brantley agreed it was in everyone’s interest to avoid a liquidation. He also conceded that if an equity offer had been agreed between McDermott and Reficar, the parties involved in the Plan “wouldn’t need to be in court”. Brantley said Reficar has not formally responded to the offer.
The CFO said the restructuring process, which also includes Dutch WHOA Plan and US court proceedings, will cost around $152mn in advisory fees, more than half of which has already been spent. Part of McDermott’s justification for the Plan is that is has suffered serious liquidity issues due to stiffer contract terms and inflation.
Such is the level of professional interest in the case that, in addition to the packed main courtroom at the High Court in London, an overspill court was also laid on – and also filled up.
As well as the $2bn of unsecured damages claims, McDermott has $2.8bn of secured debt facilities, $2.3bn of which matures in June 2024 and the rest in June 2025.
More pressingly, McDermott faces paying more than $2.2bn of cash collateral to LC lenders on March 27. One of the company’s major LC providers, Credit Agricole – which has issued $1.2bn of LCs – says it will enforce the cash collateral requirement should the Plan fail.
The Plan ultimately proposes to extend the June 2024 secured debt to June 2027, push out the June 2025 maturity to December 2027, and release the arbitration claims.
Reficar maintains that McDermott will not let the group collapse into insolvency, and instead will embark on talks to thrash out a new deal.
This is the second restructuring process for McDermott in little over three years. The company emerged from chapter 11 in 2020 with $4.6bn of debt eliminated, but the COVID-19 pandemic, supply chain disruption, and inflation badly affected its operations. McDermott also suffered a cyber attack in April last year, which left it without key operating systems for five to six weeks.
For the UK Plan hearing, witnesses will be cross-examined during the first four days, followed by two days of closing submissions. Mr Justice Michael Green is presiding,
More Adler appeal ripples
The McDermott Plan is the latest to factor in the implications from the landmark Adler Plan appeal verdict handed down last month.
Reficar also argues that the Plan proposes an unfair distribution of the restructuring surplus to the equity, which ranks behind Reficar as an unsecured creditor, without having paid the creditors who rank above them, and without any good commercial reason.
In the Adler appeal ruling, Reficar says Lord Justice Snowden confirmed that there cannot be a departure from the ordinary rules of priority under a Plan without a good commercial reason.
Reficar says, at its heart, the Plan “seeks to wipe out Reficar and (for no good commercial reason) ultimately to distribute the surplus gained to the equity which has provided no value to the group in the restructuring.”
The Plan company is a UK subsidiary of Bermuda-based McDermott International, CB&I UK Limited.
McDermott via CB&I UK Ltd is being advised by Kirkland & Ellis, the ad hoc lender group by Weil Gotshal, and Credit Agricole by Linklaters. Reficar is working with King & Spalding.
If you have any questions regarding the contents of this report contact CreditSights at firstname.lastname@example.org.
© 2023. CreditSights, Inc. All rights reserved.