Mallinckrodt PLC Downgraded To 'CCC' On Increased Distressed Exchange Risk; Outlook Negative

Specialty pharmaceutical company Mallinckrodt PLC recently announced a settlement in principle with two Ohio counties, resolving its track one multidistrict opioid litigation (MDL) case for $24 million cash and $6 million in products. The magnitude of the settlement exceeded our expectations.
While Mallinckrodt continues to generate positive free cash flow, we think the company's ability to access capital markets to refinance debt maturities is limited given uncertainty around the company's ultimate exposure to opioid liabilities, which we think could be significant. Given the maturity schedule and current debt trading levels, we think the risk of a distressed exchange is high.
We are lowering our long-term issuer rating on Mallinckrodt to 'CCC' from 'B+' due to our view of heightened risk of a distressed exchange over the next year, prior to any large settlement of opioid claims.
Our outlook is negative, reflecting the possibility that that the company could propose an exchange transaction we view as distressed as opposed to opportunistic, or that an opioid litigation settlement could leave the company unable to repay its 2020 debt maturity when it comes due.
NEW YORK (S&P Global Ratings) Sept. 11, 2019--S&P Global Ratings today took the rating actions listed above.
The downgrade reflects our belief that incentives are aligned for a distressed debt exchange over the next 12 months. It also reflects our view that risks exist to the company's stated plan to use free cash flow to repay its April 2020 maturities, especially if the company incurs further litigation settlements or is required to make a large repayment to Medicare for past Acthar sales (this is not currently in our base case). Given uncertainty around the amount and timing of opioid related liabilities, we believe the company will have difficulty accessing debt markets at acceptable rates until opioid litigation is resolved.
Our negative outlook reflects our belief that Mallinckrodt could engage in an exchange with debtholders that we would view as a default because of trading levels.
We could lower the rating on Mallinckrodt if we believe the company is at risk of a distressed exchange or restructuring within the next six months, or if it announces its intention to exchange some or all of its debt for a value less than par.
In a less likely scenario in the next year, we could lower the rating if it becomes likely that it cannot meet its obligations over the next six months. This could happen if the company faces large cash outflows related to either opioid or CMS-related litigation.
We could revise the outlook to stable or consider an upgrade if we no longer believe there are incentives for a distressed exchange in the next 12 months. In this scenario, we would believe that the company is more likely to be able to access capital markets, likely because of increased certainty around opioid and Acthar-related liabilities. Under this scenario, an upgrade could be multiple notches.
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