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Rating Action:

Moody's downgrades Mallinckrodt's CFR to Caa1; outlook remains negative

06 Sep 2019

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 in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

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Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

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

No Related Data.
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