Mallinckrodt plans to file second Chapter 11 case in coming days

By Sarah Lizee

Olympia, Wash., Aug. 23 – Mallinckrodt plc plans to file Chapter 11 bankruptcy for a second time in the coming days in the U.S. Bankruptcy Court for the District of Delaware, according to a press release issued Wednesday morning.

The company said it has entered into a restructuring support agreement with holders of about 72% of its first-lien debt and about 71% of its second-lien debt, as well as the Opioid Master Disbursement Trust II, which was created out of the company’s previous bankruptcy proceedings.

Under the terms of the RSA, the company will reduce its first-lien debt by about $1.2 billion and eliminate all of its roughly $650 million of second-lien debt, while transitioning ownership of the company to its creditors.

According to an 8-K filed with the Securities and Exchange Commission, the RSA provides for a new $250 million post-petition multi-draw, fully backstopped priming term loan facility from some existing creditors, which will be, at the election of each lender, repaid in cash at emergence or converted into takeback debt.

First-lien term debt will be reduced to $1.65 billion from $2.86 billion, which may be in the form of a new-money syndicated credit facility or takeback debt distributed to post-petition term lenders and prepetition first-lien creditors.

The prepetition first-lien creditors will also receive 92.3% of the debtors’ reorganized equity, subject to dilution, plus cash to the extent cash on hand at emergence is above specified thresholds, and takeback debt or cash.

Second-lien debt will be eliminated entirely, with second-lien creditors receiving 7.7% of the debtors’ reorganized equity, subject to dilution.

The RSA also provides for the permanent elimination of the debtors’ remaining opioid-related litigation settlement payment obligations (including the $200 million installment payment originally due on June 16) in exchange for the following:

• A $250 million payment to be made to the trust prior to the start of the Chapter 11 cases; and

• A four-year contingent value right to receive a payment (in cash or, at the company’s option subject to certain conditions, shares of the company’s equity) equal to the value of 5% of the company’s total outstanding equity (subject to dilution) less the exercise price, which will be based on a total enterprise value of $3.776 billion less funded debt at emergence plus any excess cash at emergence after the emergence-date cash sweep contemplated by the RSA.

The debtors’ non-monetary obligations to the trust will generally be preserved, including the compliance-related operating injunction.

All other claims against the debtors, except for subordinated securities claims, will be unimpaired, including the debtors’ settlement with governmental entities regarding Acthar Gel, and the associated corporate integrity agreement, and trade liabilities.

Mallinckrodt ordinary shares will be canceled for no consideration.

Vendors and suppliers are expected to be paid in the ordinary course, including for any prepetition amounts owed at the time of the contemplated filing.

Employees are expected to continue receiving their pay and benefits without interruption.

The company expects to complete the pre-packaged Chapter 11 process in the fourth quarter of 2023.

“After several months of constructive discussions, we are pleased to have reached this agreement with our key stakeholders, which will enable Mallinckrodt to better align our balance sheet with our current business plan,” Siggi Olafsson, president and chief executive officer of Mallinckrodt, said in the release.

“While we have made important progress over the past year, the steps we are taking now will strengthen our ability to navigate the challenges that have affected our business.”

In connection with the Chapter 11 filing, Mallinckrodt also intends to start examinership proceedings in Ireland, which are required to implement certain Irish law aspects of the financial restructuring plan and allow for emergence.

Latham & Watkins LLP, Wachtell, Lipton, Rosen & Katz, Arthur Cox LLP, Richards, Layton & Finger, PA and Hogan Lovells US LLP are serving as Mallinckrodt's counsel.

Guggenheim Securities, LLC is serving as investment banker, and AlixPartners, LLP is serving as restructuring adviser.

Trustees’ response

The trustees of the Opioid Master Disbursement Trust II issued a statement Wednesday regarding the upcoming filing.

“The Opioid MDT II trustees made a difficult decision in agreeing to this resolution, but in the end felt that this was the best alternative to obtain much needed funds for opioid abatement and victim compensation on a very accelerated time frame – even if the amounts received are almost $1 billion less than originally promised by Mallinckrodt just last year,” the trustees said in the statement.

“Given Mallinckrodt's downwards spiraling financial performance and the Opioid MDT II Trust's status as an unsecured creditor in a bankruptcy (in which approximately $3.5 billion in debt would be ahead of the trust in priority), the Opioid MDT II trustees believe this deal is the best possible outcome.”

The trustees said that while the amounts that victims will receive from Mallinckrodt have been substantially reduced, given all that is known about other opioid pharmaceutical defendants, the certainty of receiving funds now rather than uncertain future payments is a priority.

Mallinckrodt is a Dublin-based developer, manufacturer, marketer and distributor of specialty pharmaceutical products and therapies. The company filed Chapter 11 bankruptcy in the U.S. Bankruptcy Court for the District of Delaware on Oct. 12, 2020 under case number 20-12522, and emerged from those proceedings on May 11, 2022.

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