NOTE 3—LONG-TERM DEBT AND NOTES PAYABLE

Credit Facility

In May 2010, we entered into a credit agreement with a syndicate of lenders and letter of credit issuers (as last amended in November 2013, the “Credit Agreement”). The Credit Agreement provides for revolving credit borrowings and issuances of letters of credit in an aggregate outstanding amount of up to $950.0 million and is scheduled to mature on August 19, 2016. Proceeds from borrowings under the Credit Agreement are available for working capital needs and other general corporate purposes.

In August and November 2013, we amended the Credit Agreement to, among other things: (1) add certain amounts to EBITDA (as defined in the Credit Agreement) for the fiscal quarters ended December 31, 2012, March 31, 2013, June 30, 2013 and September 30, 2013; (2) permit us to add to EBITDA certain cash expenses related to the Atlantic segment restructuring for the quarters ended or ending September 30, 2013, December 31, 2013 and March 31, 2014; (3) increase the maximum permitted leverage ratio of total indebtedness to EBITDA from 3.00:1.00 to 3.75:1.00 for the quarters ended or ending September 30, 2013, December 31, 2013, March 31, 2014 and June 30, 2014; and (4) increase the maximum permitted leverage ratio from 3.00:1.00 to 3.50:1.00 for the quarter ending September 30, 2014. The amendments to the Credit Agreement also provide that if we either issue senior unsecured notes with a principal amount of at least $300 million or incur certain types of second lien secured indebtedness: (1) from the date of such issuance or incurrence until March 31, 2014, the maximum permitted leverage ratio will increase from 3.75:1.00 to 5.00:1.00; (2) for the fiscal quarter ending June 30, 2014, the maximum permitted leverage ratio will increase from 3.75:1.00 to 4.00:1.00; and (3) from the date of such issuance or incurrence until September 30, 2014, we will have to comply with a maximum permitted secured leverage ratio of total indebtedness outstanding under the Credit Agreement to EBITDA of 2.00:1.00. The maximum leverage ratio and the minimum interest coverage ratio as defined in the Credit Agreement may differ in the method of calculation from similarly titled measures used by other companies or in other agreements. The Credit Agreement also contains covenants that restrict, among other things, debt incurrence, liens, investments, acquisitions, asset dispositions, dividends, prepayments of subordinated debt and second lien debt, mergers and capital expenditures. We were in compliance with the covenants under the Credit Agreement as of December 31, 2013.

Other than customary mandatory prepayments in connection with casualty events, the Credit Agreement requires only interest payments on a quarterly basis until maturity. We may prepay all loans under the Credit Agreement at any time without premium or penalty (other than customary LIBOR breakage costs), subject to certain notice requirements. Loans outstanding under the Credit Agreement bear interest at the borrower’s option at either the Eurodollar rate plus a margin ranging from 1.50% to 2.50% per year or the base rate (the highest of the Federal Funds rate plus 0.50%, the 30-day Eurodollar rate plus 1.0%, or the administrative agent’s prime rate) plus a margin ranging from 0.50% to 1.50% per year. The applicable margin for revolving loans varies depending on the credit ratings of the Credit Agreement. We are charged a commitment fee on the unused portions of the Credit Agreement, and that fee varies between 0.200% and 0.450% per year depending on the credit ratings of the Credit Agreement. Additionally, we are charged a letter of credit fee of between 1.50% and 2.50% per year with respect to the amount of each financial letter of credit issued under the Credit Agreement and a letter of credit fee of between 0.75% and 1.25% per year with respect to the amount of each performance letter of credit issued under the Credit Agreement, in each case depending on the credit ratings of the Credit Agreement. Under the Credit Agreement, we also pay customary issuance fees and other fees and expenses in connection with the issuance of letters of credit under the Credit Agreement. In connection with entering into the Credit Agreement and certain amendments to the Credit Agreement, we paid certain fees to the lenders thereunder, and certain arrangement and other fees to the arrangers and agents for the Credit Agreement, which are being amortized to interest expense over the term of the Credit Agreement.

At December 31, 2013, there were no borrowings outstanding, and letters of credit issued under the Credit Agreement totaled $214.3 million. At December 31, 2013, there was $735.7 million available for borrowings or to meet letter of credit requirements under the Credit Agreement. During the year ended December 31, 2013, our outstanding borrowings under the Credit Agreement did not exceed $80.0 million, and we had average outstanding borrowings under the Credit Agreement of approximately $23.5 million, with an average interest rate of 2.28%. At December 31, 2012, there were no borrowings outstanding, and letters of credit issued under the Credit Agreement totaled $267.3 million. In addition, we had $96.9 million and $117.6 million in outstanding unsecured bilateral letters of credit at December 31, 2013 and 2012, respectively.

At December 31, 2013, based on the credit ratings applicable to the Credit Agreement, the applicable margin for Eurodollar-rate loans was 2.00%, the applicable margin for base-rate loans was 1.00%, the letter of credit fee for financial letters of credit was 2.00%, the letter of credit fee for performance letters of credit was 1.00%, and the commitment fee for unused portions of the Credit Agreement was 0.25%. The Credit Agreement does not have a floor for the base rate or the Eurodollar rate.

Obligations under the Credit Agreement are secured on a first-lien basis by pledges of capital stock of certain of our subsidiaries and mortgages and other security interests covering (1) all of our personal property and substantially all of the personal property of our wholly owned subsidiaries, subject to exceptions for bank accounts, equipment and certain other assets, and (2) certain of our marine vessels.

Anticipated Refinancing

Due to the anticipated future impact on our cash flows from various operating and commercial issues that contributed to our operating loss for the year ended December 31, 2013, and, although we were in compliance with the financial covenants under the Credit Agreement we began discussions with the lenders under the Credit Agreement concerning a potential amendment to the Credit Agreement that would, among other things, amend the financial covenants and potentially restructure the form and amount of borrowing limits. We also engaged Goldman, Sachs & Co. to assist us in exploring future financing alternatives, including potential secured financing.

On March 2, 2014, we entered into a commitment letter (the “Commitment Letter”) with Goldman Sachs Lending Partners LLC (“Goldman Sachs”), under which Goldman Sachs has committed, subject to the terms and conditions set forth in the Commitment Letter, to provide us with $950 million aggregate principal amount of new senior secured financing. Such new financing is expected to be available to us during the time period which we expect to negotiate an amendment to the Credit Agreement. Upon completion of the Credit Agreement amendment, we would expect to terminate the new financing commitment. The new senior secured financing contemplated by the Commitment Letter would have a term of five years, and the proceeds thereof would provide funded capacity for letters of credit, as well as funding for working capital needs and general corporate purposes.

The indebtedness under the new senior secured financing would be secured on a first-lien basis by pledges of capital stock of certain of our subsidiaries and mortgages and other security interests covering all the assets that are currently collateralizing the indebtedness under the Credit Agreement.

Goldman Sachs’ commitment to provide the new senior secured financing is subject to, among other things, the execution of definitive loan documentation and the satisfaction of other customary conditions precedent for financings of this type. However, if the Credit Agreement is not amended as currently contemplated, our management believes that the new financing commitment, taken together with our cash flows from operations, will be sufficient to fund our liquidity and letter of credit requirements for at least the next 12 months.

The Commitment Letter extends until April 25, 2014. Depending on the developments relating to the contemplated amendment to the Credit Agreement, it is possible that the refinancing transactions we ultimately enter into will differ from those described above. In connection with the Commitment Letter, we paid Goldman Sachs an up-front commitment fee. In the event we utilize the new committed financing, we would pay Goldman Sachs funding and other customary fees.

North Ocean Financing

North Ocean 102

In December 2009, J. Ray McDermott, S.A. (“JRMSA”), a wholly owned subsidiary of MII, entered into a vessel-owning joint venture transaction with Oceanteam ASA. As a result of that transaction, we had consolidated notes payable of approximately $31.4 million and $37.3 million on our consolidated balance sheets at December 31, 2013 and 2012, respectively, of which approximately $31.4 million and $6.0 million was classified as current notes payable at December 31, 2013 and 2012, respectively. JRMSA guaranteed approximately 50% of this debt based on its ownership percentages in the vessel-owning companies. The debt bore interest at a rate equal to the three-month LIBOR (which resets every three months) plus a margin of 3.557% and matured in January 2014. JRMSA paid in full the approximately $31.4 million notes payable balance upon maturity during January 2014. JRMSA expects to exercise its option to purchase Oceanteam ASA’s 50% ownership interest in the vessel-owing companies in December 2014.

North Ocean 105

On September 30, 2010, MII, as guarantor, and North Ocean 105 AS, in which we have a 75% ownership interest, as borrower, entered into a financing agreement to finance a portion of the construction costs of the North Ocean 105. The agreement provides for borrowings of up to $69.4 million, bearing interest at 2.76% per year, and requires principal repayment in 17 consecutive semi-annual installments, which commenced on October 1, 2012. Borrowings under the agreement are secured by, among other things, a pledge of all of the equity of North Ocean 105 AS, a mortgage on the North Ocean 105, and a lien on substantially all of the other assets of North Ocean 105 AS. MII unconditionally guaranteed all amounts to be borrowed under the agreement. At December 31, 2013, there was $57.2 million in borrowings outstanding under this agreement, of which approximately $8.2 million was classified as current notes payable. At December 31, 2012, there was $65.4 million in borrowings outstanding, of which $8.2 million was classified as current notes payable.

ANZ Reimbursement Agreement

On April 20, 2012, McDermott and one of its wholly owned subsidiaries, McDermott Australia Pty. Ltd. (“McDermott Australia”), entered into a secured Letter of Credit Reimbursement Agreement (the “Reimbursement Agreement”) with Australia and New Zealand Banking Group Limited (“ANZ”). In accordance with the terms of the Reimbursement Agreement, ANZ issued letters of credit in the aggregate amount of approximately $109.0 million to support McDermott Australia’s performance obligations under contractual arrangements relating to a field development project. The obligations of McDermott and McDermott Australia under the Reimbursement Agreement are secured by McDermott Australia’s interest in the contractual arrangements and certain related assets. During February 2014, we replaced these letters of credit with letters of credit issued under the Credit Agreement.

Surety Bonds

In 2012 and 2011, MII executed general agreements of indemnity in favor of surety underwriters based in Mexico relating to surety bonds issued in support of contracting activities of J. Ray McDermott de Mèxico, S.A. de C.V. and McDermott, Inc, both subsidiaries of MII. As of December 31, 2013 and 2012, bonds issued under these arrangements totaled $43.5 million and $50.1 million, respectively. In October 2013, MII executed general agreements of indemnity in favor of surety underwriters relating to surety bonds in support of vessels operating in Brazil. The bonds issued under these arrangements totaled $106.3 million as of December 31, 2013.

Long-term debt and notes payable obligations

A summary of our long-term debt obligations are as follows:


	December 31,
	2013		2012
	(In thousands)
Long-term debt consists of:
North Ocean 102 Construction Financing	$	31,373	$	37,349
North Ocean 105 Construction Financing		57,189		65,359

		88,562		102,708
Less: Amounts due within one year		39,543		14,146

Total long-term debt	$	49,019	$	88,562

Maturities of long-term debt during the five years subsequent to December 31, 2013 are as follows:


	(In thousands)
2014	$	39,543
2015		8,170
2016		8,170
2017		8,170
2018		8,170
Thereafter		16,339

Total	$	88,562