New York, September 06, 2019 -- Moody's Investors Service ("Moody's") downgraded
Mallinckrodt International Finance SA's ("Mallinckrodt") Corporate Family
Rating ("CFR") to Caa1 from B2 and Probability of Default Rating ("PDR")
to Caa1-PD from B2-PD. Moody's downgraded the senior
secured revolver and term loans to B2 from Ba3, the guaranteed senior
unsecured notes to Caa2 from B3, and the unguaranteed senior unsecured
notes to Caa3 from Caa1. The Speculative Grade Liquidity Rating
was downgraded to SGL-4 from SGL-2. The outlook remains
negative.
The ratings downgrade reflects: weak liquidity; rising risk
of a transaction that Moody's would consider to be a distressed
exchange; uncertainty about the longer-term sustainability
of cash flows; and exposure to opioid litigation.
The downgrade of the Speculative Grade Liquidity Rating to SGL-4
reflects Moody's view that Mallinckrodt's liquidity will be
weak over the next 12 months as it faces a large upcoming notes maturity
of $700 million in April 2020. It also reflects Mallinckrodt's
full draw on its $900 million revolver, using up all of its
committed external liquidity. Mallinckrodt's liquidity benefits
from substantial cash (exceeding $550 million at the beginning
of September 2019, inclusive of proceeds from its full revolver
draw) as well as good free cash flow. Moody's believes that
Mallinckrodt would likely be able to meet the April 2020 maturity with
available cash and cash flow. However, given the sizeable
debt maturity, there is minimal cushion to absorb any litigation
or other required payments. For example, there is risk that
Mallinckrodt would have to make up to $600 million in retroactive
payments to Medicaid related to Acthar. Even without this payment,
Mallinckrodt faces considerable uncertainty around the timing and amount
of possible opioid related cash outflows. In Moody's view,
risks stemming from Mallinckrodt's exposure to opioid litigation
are high, in both its branded and generics businesses, potentially
posing a challenge to capital market access.
The downgrade also reflects Moody's view that Mallinckrodt could
pursue a transaction or transactions that Moody's considers to be
a distressed exchange, and hence a default under Moody's definition.
Mallinckrodt has been repurchasing debt at highly distressed levels and
may pursue further repurchases as its debt prices remain depressed.
The uncertainty over opioid litigation, in Moody's view,
reduces the value of Mallinckrodt's assets to potential strategic
buyers, thus limiting recovery prospects on the unsecured debt in
a liquidation scenario.
The downgrade also reflects mounting concerns on Mallinckrodt's
largest drug franchises, which make the sustainability of its cash
flows uncertain over the longer-term. Specifically,
Acthar (Mallinckrodt's largest drug) faces reimbursement challenges
from payors. Further, there is rising risk of generic competition
on Mallinckrodt's second largest franchise, INOmax,
following an adverse ruling in a patent infringement case at a federal
appeals court in August 2019. Lastly, Mallinckrodt's
third largest franchise, Ofirmev, faces generic competition
in late 2020.
The outlook is negative, reflecting earnings declines in Mallinckrodt's
key franchises and risk of deteriorating liquidity, particularly
if Mallinckrodt is required to make a large cash payment to Medicaid prior
to repaying its April 2020 maturity. The outlook also reflects
high exposure to opioid-related litigation, and the risk
of large future cash outflows.
Ratings downgraded:
Mallinckrodt International Finance SA:
Corporate Family Rating to Caa1 from B2
Probability of Default Rating to Caa1-PD from B2-PD
Senior unsecured notes to Caa3 (LGD6) from Caa1 (LGD6)
Mallinckrodt International Finance SA and co-borrower Mallinckrodt
CB LLC:
Senior secured term loan B due 2024 and 2025 to B2 (LGD2) from Ba3 (LGD2)
Senior secured revolver expiring 2022 to B2 (LGD2) from Ba3 (LGD2)
Guaranteed unsecured notes to Caa2 (LGD5) from B3 (LGD5)
Speculative Grade Liquidity Rating to SGL-4 from SGL-2
Outlook Actions:
Outlook remains negative
RATINGS RATIONALE
Mallinckrodt's Caa1 CFR reflects its elevated financial leverage and high
earnings concentration in one drug, Acthar. It also reflects
corporate governance risks associated with management's approach
to capital structure and liability management in the face of various business
challenges. Mallinckrodt has high exposure to opioid-related
litigation, which while highly uncertain, has the potential
to result in large future cash outflows. Mallinckrodt also faces
challenges to its core business, including returning Acthar to long
term revenue growth due in part to significant hurdles that patients face
to get their insurance company to pay for the drug. In addition,
Mallinckrodt faces risk of lower reimbursement from payors that will reduce
revenue over time. At the same time, Mallinckrodt continues
to consider ways to exit non-branded segments, and faces
potential generic competition on several of its largest franchises.
Mallinckrodt's ratings are supported by its moderate scale in specialty
branded pharmaceuticals and its growing hospital-based business.
The SGL-4 Speculative Grade Liquidity Rating reflects Moody's view
that Mallinckrodt's liquidity will be weak over the next 12 months,
as discussed above. Moody's expects good cash generation in excess
of $450 million in 2020, prior to debt repayment or potential
payments for litigation. The revolver has a springing 5x net leverage
covenant if more than 25% of the facility is drawn. Moody's
believes the covenant will be in effect through 2020 and that Mallinckrodt
will have sufficient cushion to comply.
Moody's could downgrade Mallinckrodt's ratings if there is a payment to
The Centers for Medicare and Medicaid Services (CMS) that further exacerbates
Mallinckrodt's ability to meet its April 2020 maturity. Further
debt repurchases at highly distressed levels or other debt restructuring
alternatives could also result in a downgrade. Although unlikely
in the near term, a material improvement in Mallinckrodt's
liquidity position and reduced uncertainty related to the impact of opioid-related
legal matters would also be needed to support an upgrade.
The principal methodology used in these ratings was Pharmaceutical Industry
published in June 2017. Please see the Rating Methodologies page
on www.moodys.com for a copy of this methodology.
Luxembourg-based Mallinckrodt International Finance SA is a subsidiary
of Staines-upon-Thames, UK-based Mallinckrodt
plc (collectively "Mallinckrodt"). Mallinckrodt is a specialty
biopharmaceutical company with reported revenues of approximately $3.2
billion.
REGULATORY DISCLOSURES
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
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same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
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provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
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Morris Borenstein
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Jessica Gladstone, CFA
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
