In short: Alluvial Fund: "the most fascinating development in the portfolio this quarter." An energy EPC "with a troubled past and a bright future" that "has all but completed its legacy zero-profit and loss-making contracts," leaving one problem — "a weak balance sheet… negative equity position hinder[ing] McDermott from bidding on desirable contracts." The fix is a $500 million rights offering plus a term-loan refinancing, and the structure is the trade: "priced at a gigantic discount to pre-offering trading levels," with no over-subscription rights — "holders who do not exercise their rights will be diluted to oblivion," with unexercised rights taken up by the four large backstopping shareholders. "Obviously, Alluvial Fund will be participating… to the fullest." Valuation: "3.2x 2027 EBITDA guidance," and "less than 4x 2028 earnings." The template cited is Garrett Motion's 2021 rights offering — "right down to the near-identical large holder backstop feature."
McDermott designs and builds large energy facilities. It went through a painful period taking on contracts that lost money; those are now essentially finished, so it should be profitable again. The remaining obstacle is its balance sheet — it owes more than it owns on paper, which stops customers awarding it big contracts and keeps the shares cheap.
The fix is a $500 million rights offering: existing shareholders get the right to buy new shares at a fixed price. What makes this one unusual is that the price is set far below where the shares trade, and there is no facility to buy more than your allocation. Anyone who does not take part is therefore massively diluted, and the shares they decline go to four large investors who have agreed to underwrite the deal. Alluvial will take up its rights in full — declining would simply hand value away.
Afterwards the company is far safer and, on their numbers, trades at about three times its 2027 earnings before interest, tax and depreciation, or under four times 2028 earnings. The manager compares it directly to Garrett Motion's 2021 rights offering, down to the same backstop structure, which turned into a very large winner after a couple of dull years.
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