mcdermott international ltd - MCDIF

McDermott International (MCDIF) shows $8.43B in revenue but a steep net loss of $2.909B, with net margin around -34.5% and operating/pretax margins deeply negative. The profile highlights acute balance-sheet stress — current ratio 0.376, cash ratio 0.126, total debt to enterprise value ~116.3% and total debt to assets 63.6% — and extreme negative profitability metrics (ROA -32.0%, ROIC -197.9%), indicating significant solvency and liquidity risk for equity and creditors.

Analysis

Market structure: McDermott’s balance-sheet (current ratio 0.376, total debt/EV >1.16, net margin -34%) signals a near‑distress reallocation in E&C contracts. Winners will be well‑capitalized contractors able to absorb reallocated backlog (KBR, JEC, FLO‑if solvent); losers include McDermott subcontractors, marine vessel lessors, and short‑term suppliers facing payment delays. Pricing power should flow to survivors as project execution capacity tightens, likely lifting bid prices by mid‑single digits to low‑teens percent over 6–12 months for complex offshore work.

Risk assessment: Tail risks include bankruptcy filing within 3–9 months, mass lien filings, or significant litigation that could wipe equity. Immediate (days) risk: accelerated equity selloff on adverse filings; short‑term (weeks–months): covenant breaches and supplier stops; long‑term (12–24 months): recovery depends on asset sales, contract novations, or government support. Hidden dependencies: large vessel/fab yard leases and contingent contract liabilities that can trigger cross‑defaults; key catalysts are next SEC filings, upcoming bond maturities and major contract awards/terminations.

Trade implications: Direct play is a directional short of McDermott equity (OTC: MCDIF/MCDDF) with a 3‑month horizon and tight stop; relative value: pair long KBR (KBR) vs short MCDIF to capture share reallocation and margin compression of weak peers over 3–9 months. Cross‑asset moves: expect sector HY spreads +100–300bps; hedge via HYG put spreads or buy protection on single‑name bonds. Options: where equity options illiquid, favor ETF hedges (HYG/PHB) or buy listed puts on stable contractors if volatility spikes.

Contrarian angles: The consensus that equity is worthless may be premature if management can sell fabrication assets — senior secured creditors could recover >40c. Historical parallel: Chicago Bridge & Iron restructuring where equity was wiped but secured bondholders recovered material value and survivors captured pricing upside. Watch for unintended consequence: a McDermott exit tightening capacity and accelerating pricing power for survivors — a 6–18 month trade that could deliver asymmetric upside for selected longs.

Key Decisions for Investors

• Establish a 2–3% NAV short position in McDermott International (OTC: MCDIF / MCDDF) within 5 trading days; set a hard stop at +20% loss and target exit at 50% decline or on bankruptcy filing (expected window 3–9 months).
• Initiate a 1.5–2% NAV long in KBR (KBR) as a pair trade with the McDermott short (long KBR / short MCDIF) targeting 10–20% absolute upside or 15%+ relative outperformance over 3–9 months, rebalance if KBR outperforms by 10% intraperiod.
• Buy credit/sector protection: allocate 1–2% NAV to HYG 3‑month put spread (e.g., Apr expiry) sized to hedge HY spread widening of +150–300bps; if HYG moves +150bps, increase protection to 3% NAV.
• If McDermott senior secured bonds trade below $0.40 on the dollar, deploy up to 1% NAV to accumulate selective secured paper with a 12–24 month hold target recovery 40–60c; otherwise avoid unsecured equity as likely to be impaired.
• Monitor three specific catalysts before adjusting sizes: upcoming 10‑Q / earnings within 30 days, any bond covenant/maturity within 90 days, and major contract terminations/awards — increase shorts on negative prints, reallocate to survivor longs if asset-sale proceeds are disclosed.