Background

Most of the detail provided here has been mentioned in previous coverage, but for the sake of completeness we’ll include a short background section.

McDermott’s been in financial distress for several years. It only exited Chapter 11 a few years ago, but since then it’s been buffeted by further adverse winds.

Reficar

During the Chapter 11 process, Refineria de Cartagena (Reficar) was engaged in an arbitration against the plan company, McDermott’s UK subsidiary CB&I UK Ltd, and certain other group companies relating to a purported breach by the group of its obligations under a contract between the two in connection with the ‘Cartagena project’. Ultimately, the arbitral tribunal found in Reficar’s favour to the tune of US$937,495,061 (plus significant interest and net costs of US$58,676,023).

McDermott immediately filed a petition to vacate the award in New York, following which there were discussions between the parties. But then, very much to Reficar’s surprise, McDermott issued a ‘practice statement letter’ — the starting pistol to this restructuring — pursuant to which the group proposed to effectively wipe out Reficar’s award without its consent via the UK process.

Contraloría

Separately, an administrative agency of Colombia, Contraloría General de la República (Contraloría), commenced an investigation into the Cartagena project, and those involved with it (including McDermott). Ultimately, McDermott and certain other parties (the contribution claimants) were found liable for cost overruns of up to $718.4m.

Other problems

If that wasn’t enough, McDermott also faced looming maturities under its super senior letter of credit (LC) facility, a make-whole term loan facility, a senior LC facility, and an escrow LC facility on 30 June 2024. The group also had a takeback term loan facility maturing on 30 June 2025 (collectively, the secured facilities).

The thing purportedly driving the timetable here, though, was the energy service firm’s obligation to post cash collateral equal to 105% of the face value of all then-outstanding letters of credit on 27 March 2024 — $2.2 billion — an obligation McDermott (unsurprisingly) claimed it would be unable to satisfy.

What’s the plan, then?

Despite the bold nature of the deal struck, McDermott’s plan is actually relatively straightforward. It doesn’t provide for new money. All it really does in relation to the secured facilities is extend them out to 30 June 2027 (and the takeback term loan facility to 31 December 2027).

The controversial element of the plan is that it effects the release of the c. $2bn worth of Reficar, Contraloría and contribution claims in exchange for nominal consideration (an EBITDA-linked variable cash payment, capped at $2m, with a minimum spend of £800,000). The contribution claimants, being even more deeply subordinated, would only receive a fixed amount of £100,000.

McDermott’s plan placed the secured facilities into five separate classes, all of which voted unanimously to approve the plan at meetings held on 1 February 2024. The plan also contained two unsecured classes, the Dispute Plan Class (Reficar and Contraloria) and the Contribution Claim class (the Wood Parties), both of which voted against the plan.

The energy services firm also launched parallel Dutch (WHOA) processes alongside its UK Restructuring Plan, designed to ensure the amendments carried out under the English process were effective as a matter of Dutch law against the relevant creditors.

Bizarre twists and turns

“At the start of the hearing I had a lot of sympathy for Reficar and the position it was in,” Mr Justice Green said at the start of his judgment. This was based on the fact that McDermott had negotiated and agreed a deal with its secured creditors without reference to Reficar which had the effect of pushing secured creditor maturities whilst removing “Reficar’s debt from the balance sheet but [leaving] other unsecured creditors and the equity in the Group whole”.

That sympathy appeared to run out pretty quickly though, in the context of some “extraordinary developments” during the course of the trial itself — involving without prejudice offers, negotiations and assorted fun and games. There seems to have been some shady chicanery…

Which equity is equitable?

Equity offer 1

What we do know is that on 7 December 2023, with a view to settling the dispute, McDermott made an open offer to Reficar by which it would issue it with $50m preference shares in the group’s Bermudan parent company, McDermott International ltd (MIL), to settle the dispute. Reficar did not openly respond, but negotiations continued.

Equity offer 2

Remember there was a parallel Dutch (WHOA) process?

Well, over there, a restructuring expert was appointed to facilitate negotiations between the parties. The restructuring expert determined that Reficar should be offered equity in McDermott International Holdings BV. Reficar’s preference was to have equity in the ultimate holding entity, MIL.

McDermott made an open offer to Reficar on 10 February 2024, two days into the group’s six-day sanction hearing, on the same terms as proposed by the Dutch restructuring expert — $75m of preference shares in MIL, convertible into ordinary shares representing 19.9% of the ordinary share capital in that entity.

Revised equity offer 2

Whilst it seemed equity offer 2 was pretty much what Reficar had been after, they raised concerns about protection from future equity dilution — to which McDermott revised equity offer 2 on 13 February.

The judge was informed that Reficar’s board would hold a meeting on 13 February to consider revised equity offer 2. But, as McDermott’s representatives gave their closing submissions on 14 February, Reficar did not “at any point” reveal the outcome of that board meeting.

One of Reficar’s main arguments throughout the hearing was that the court should refuse to sanction McDermott’s plan because a fairer deal could be agreed between the parties and a fairer plan could therefore be re-launched in short order. We consider this point in greater detail below in the context of the ‘relevant alternative’.

“On the final day of trial, Thursday 15 February 2024, there was a bizarre twist that almost completely derailed Reficar’s position,” the judge said.

Reficar’s solicitors, King & Spalding, had sent a “holding response” to revised equity offer 2 explaining that its board had not rejected the offer but had to carry out due diligence as it’s majority owned by the Colombian government (and so it involves public funds).

A letter from the Dutch restructuring expert, which was disclosed to the judge, clarified that the expert would seek the sanction of a settlement on the same terms as proposed by McDermott. Should Reficar continue to oppose McDermott’s plan it would instead receive a smaller equity stake equal to 10.9% of MIL’s ordinary share capital. So say yes and get 19.9% or say no and get 10.9%. Should be relatively straightforward, right? Wrong!

Reficar was still considering McDermott’s offer before 25 February, around the time Mr Justice Green was preparing his judgment. The judge noted that Reficar’s points against McDermott’s plan were “severely undermined by its refusal to agree the deal it has sought”.

Reficar informed the judge it had accepted revised equity offer 2 on 26 February.

Being broke ain’t cheap

“I was horrified to discover that [McDermott] has spent around $150m on professional fees in negotiating with its secured creditors from December 2022 and then putting forward the plan and taking it to this hearing,” Mr Justice Green said. To finance its restructuring, McDermott effectively spent much of the $250m in new money it raised from an effective drop-down financing involving a carve-out of its “Tanks Business”.

The judge seconded the discomfort expressed by Baupost partner Richard Carona, a witness for the supportive AHG, at this “enormous” sum of money. “I agree with his comment that there seems to something wrong with the restructuring industry, particularly in the US, where the costs appear to be out of control.”

Mr Justice Green expressed his hope that there was a “better way” to do financial restructurings as costs of this magnitude may prevent the sort of restructurings Part 26A (i.e. UK Restructuring Plans) was meant to encourage.

Legal issues at play

While there were more than three legal issues raised at the hearing, some of the matters raised in skeleton arguments were not contested in the end, so were not covered in the judgment. These points were:

• Is the plan a compromise or arrangement?
• What is the Relevant Alternative to the plan and would Reficar be worse off under the plan than the Relevant Alternative?
• Is the plan unfair to Reficar because of how the ‘restructuring surplus’ is allocated?

Is the plan a compromise or arrangement?

For the court to have jurisdiction to sanction a plan, the plan must be a compromise or arrangement. That’s to say, it must involve some element of give and take. You can’t just take away someone’s rights without giving them something in return. Here, Reficar and Contraloria are releasing substantial debt claims in exchange for fractional entitlements. So the analysis goes to sufficiency — when is enough, enough?

Lord Justice Snowden noted in Adler that some “small payment” to an out of the money class would probably be enough.

David Allison KC, McDermott’s representative, guided the judge through a section of Mr Justice Snowden’s (as he then was) decisions in Smile Telecoms, where he said that a small payment amounting to 0.025% of the debt claim was enough. That’s less then here. The judge agreed, therefore, that the £800,000 minimum payment to Reficar and Contraloría, though “very small by comparison with the total debt”, was still a greater recovery than unsecured creditors would receive in a liquidation — and so was enough.

No worse off test — what’s the relevant alternative?

In addition to being satisfied that there’s at least one in the money class approving the plan, in order to cram-down dissenting creditors — here Reficar and Contraloría — the judge needs to be happy (but not necessarily certain) that those creditors would not be worse off under the plan that in the relevant alternative.

The default position seems to be that the plan company directors are uniquely well-placed to identify what the relevant alternative is. However, as the judge said here, it’s often in the interests of those same directors to present a doomsday scenario as the relevant alternative. This default position, therefore, needs to be tempered with commercial good sense and directors’ duties — if the plan were unsuccessful, would the directors really just lump it all and file for insolvency immediately? Probably not.

This was the core issue at trial, and the centre of Reficar’s argument that they should not be crammed-down. Spoiler alert: a coach and horses was driven through this argument by… Reficar!

Plan company’s relevant alternative?

On the basis of significant valuation evidence, the plan company said that the relevant alternative is insolvency in the local jurisdictions (combined with an accelerated sale of the Tanks Business on a ringfenced basis).

Reficar’s relevant alternative?

Reficar said the most likely alternative is negotiations with the group and stakeholders towards a deal which preserves value and provides for a fairer distribution.

McDermott roundly refuted this, stating that it’s both vague and unlikely. They said that if this sort of ransom value were successfully obtained, it would render the UK Restructuring Plan otiose.

The judge thought the ransom value argument was laid on a little thick. But that ultimately didn’t matter, because Reficar successfully showed how likely their relevant alternative was during the shady chicanery of the negotiations before and during the trial. Reficar hadn’t accepted the various equity offers (including the one approved by the Dutch restructuring expert) by the end of the trial. On that basis, it’s difficult to see how a fresh ‘fairer’ deal which is supported by Reficar was likely to occur imminently.

As a consequence of this, Felicity Toube KC — counsel for Reficar — had to scramble around for an alternative relevant alternative in her closing submissions. She ended up presenting two further relevant alternatives. There’s not much point in diving into those further. Suffice to say, neither of them would actually have moved the needle in terms of recoveries, and so the analysis did not change in any event.

Is the plan an unfair allocation of the restructuring surplus?

We spoke extensively about fair / unfair allocations of the ‘restructuring surplus’ in the context of Adler — read our Under the hood, in which it’s covered in some detail.

In Adler, Snowden said that the method for assessing allocations between creditor classes is the horizontal comparator — an assessment of distributions between creditors. 

• The point here is that, initially, Reficar and Contraloria would be fully released whilst other unsecureds and the shareholders were to be kept whole. McDermott’s position was that it’s for in the money creditors to determine how the surplus is carved up. The judge said that he saw some force in Reficar’s argument here — and that there should be some form of horizontal comparison between unsecureds / shareholders in testing overall fairness. Indeed, an equity issuance was needed in the Netherlands to ensure fairness.
• This position clearly did not remain the case following the opinion of the Dutch restructuring expert, and the proposed issuance of preferred, convertible, equity.
• There was plainly no unfairness now, given receipt of equity (whether 10.9% or 19.9%).

What next?

McDermott’s WHOA plans are expected to be sanctioned by the middle of March; voting has already taken place, with unanimous approval from the secured creditor classes, according to a source familiar with the Dutch process.

The group’s Chapter 15 hearing is due to take place on 22 March 2024.

Advisors

McDermott was advised by Kirkland & Ellis (legal) in London, with advisors Credit Suisse (financial) and Alvarez & Marsal (restructuring) supporting.

The supportive AHG was represented by Weil (legal), while Crédit Agricole (part of SteerCo) was advised by Linklaters (legal).

Reficar was advised by King & Spalding (legal). A non-consenting LC AHG used Akin Gump (legal) and Houlihan Lokey (financial).

Our customers receive this news ahead of the crowd. To learn more about news on the 9fin platform, request a free trial below.