Mon 08/28/2023 13:39 PM
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Relevant Documents:
Voluntary Petition
First Day Declaration
DIP Financing Motion
Plan / Disclosure Statement
Disclosure Statement Motion


 

















Summary
“Straddle” prepackaged chapter 11 plan would restructure debt and eliminate future opioid settlement obligations from prior reorganization, which went effective in June 2022
First lien creditors to receive 92.3% of predilution reorganized equity plus take-back debt; second lien creditors to receive 7.7% of predilution reorganized equity
Company to fund cases with $250 million DIP from first lien lenders and $170 million in availability under an A/R revolving facility; targets Oct. 3 confirmation hearing, Q4 emergence

Mallinckrodt plc, a Dublin, Ireland-based pharmaceutical manufacturer, and several affiliates filed their anticipated chapter 11 “straddle” prepackaged cases in the Bankruptcy Court for the District of Delaware today, Monday, Aug. 28, just over 14 months after the company emerged from its prior chapter 11 reorganization and five days after commencement of prepetition solicitation. The debtors filed with a prepackaged plan supported by 88% of first lien creditors, 86% of second lien creditors and the opioid master disbursement, or MDT II, trust created under their first chapter 11 plan. Mallinckrodt is looking to emerge from bankruptcy in the fourth quarter of 2023.

The debtors announced the commencement of solicitation on their prepackaged plan in an 8-K on Aug. 23. Under the plan, first lien creditors would receive 92.3% of reorganized equity and second lien creditors would receive 7.7%, both on a pre-dilution basis. Potential dilution would include a management incentive plan, or MIP, for up to 10% of reorganized equity and four-year contingent value rights, or CVRs, for the MDT II trust for up to 5% of reorganized equity, struck at an enterprise value of $3.776 billion. First lien creditors would also receive $1.65 billion of take-back debt.

The disclosure statement provides the following summary of the proposed restructuring:

  • The debtors’ existing receivables financing facility would be converted into a postpetition receivables financing facility and then into a $200 million post-emergence receivables financing facility. Holders of receivables claims would also benefit from a cash sweep to the extent cash at emergence is in excess of $160 million;

  • Each lender under the debtors’ $250 million DIP facility would receive cash equal to amounts in excess of the “DIP Cash Sweep Trigger” (defined as the company having more than $160 million of unrestricted cash immediately before the effective date) and/or syndicated exit financing, provided that if the proceeds of the exit financing and cash total less than $280 million, DIP claims equal to the shortfall would be converted into new first-priority take-back term loans.

    • A sources and uses table shown below assumes a $150 million cash sweep to DIP claims.



  • First lien creditors would share:

    • 92.3% of reorganized equity (subject to the MIP and CVR dilution discussed above);

    • Payment of accrued interest in cash;

    • Cash from the “Exit Minimum Cash Sweep” (a sweep of cash to the first lien lenders after sweeps to DIP claims and receivables claims, leaving the debtors with $160 million in cash upon emergence) and proceeds of the syndicated exit facility; and

    • Second-out first-priority take-back debt.



  • Second lien creditors would share 7.7% of reorganized equity (subject to MIP and CVR dilution);

  • In full satisfaction of all obligations to the MDT II trust created under the first chapter 11 plan, the trust would receive the $250 million prepetition cash payment, which was made on Aug. 24, plus four-year CVRs (payable in cash or reorganized equity) equal to (i) the value of 5% of reorganized equity minus (ii) an exercise price based on a total enterprise value of $3.776 billion minus funded debt at emergence plus any excess cash at emergence;

  • All other claims (other than subordinated securities claims) would be unimpaired; and

  • All prepetition equity interests would be canceled.


According to the first day declaration of Chief Restructuring Officer Jason Goodson, “Mallinckrodt firmly believes that the Company’s underlying businesses are strong” and the plan would “provide the de-leveraging necessary to better position the Company for long-term success.”

According to the court’s calendar, a first day hearing is set for Wednesday, Aug. 30, at 10 a.m. ET.

The debtors’ prepetition capital structure is shown below:

MEH Inc. is the servicer under the prepetition receivables financing facility, and nondebtor ST US AR Finance LLC, a direct subsidiary of MEH, is the borrower. Barclays is the agent. The facility was available up to $200 million, but following a draw of $100 million on July 13, the facility was amended to limit total availability to $100 million, and was then fully drawn down. The facility is secured by a first-priority lien on accounts receivables, or AR, and related assets sold by MEH’s subsidiaries to ST US AR Finance.

Acquiom Agency Services LLC and Seaport Loan Products LLC are co-administrative agents under the prepetition first lien term loans. Wilmington is trustee under the first lien notes and second lien notes. Deutsche Bank is collateral agent under all of the first lien term loans and notes. Wilmington is collateral agent under the second lien notes.

In addition, the debtors are party to two separate settlement agreements as part of their previous plan, obligating them to make remaining payments of $1.275 billion to an opioid trust and $230 million to federal Acthar claimants.

As discussed above, the proposed plan includes a settlement with the opioid trust, and on Aug. 24 Mallinckrodt paid $250 million to the trust. The Acthar settlement contains “snapback” provisions whereby if Mallinckrodt files a bankruptcy proceeding before the settlement amount is paid in full, the United States is entitled to rescind the releases in the settlement agreement and bring an action to recover unpaid settlement proceeds less any payments received pursuant to the settlement agreement. Future payments related to the Acthar settlement will be unaffected by the current bankruptcy filing.

Sources and uses for the proposed plan are shown below:

The debtors’ sources and uses assuming syndicated exit loans are available HERE. The debtors expect to exit chapter 11 with $160 million in cash.

The DS states that Mallinckrodt’s post-emergence capital structure would consist of:

  • Syndicated exit financing: Up to $1.65 billion of new-money first lien debt financing, the terms of which would be reasonably acceptable to require supporting first lien term loan group creditors and require supporting crossover group creditors. Net proceeds would be used to repay allowed DIP claims and first lien claims under the plan.

  • New take-back debt in the principal amount of $1.65 billion minus the original principal amount of debt issued or borrowed in the syndicated exit financing, consisting of first-priority take-back term loans and new second-priority take-back debt.

  • Exit AR facility: Up to approximately $200 million would be available under the facility, with a $100 million balance drawn and outstanding on the effective date. This facility would be available on substantially similar terms to the postpetition AR facility (subject to reasonable modifications made in connection with such facility becoming a post-emergence facility), or other alternative exit financing (if any) to refinance the postpetition AR facility.


According to Reorg’s CLO database, CLO holders of Mallinckrodt debt include trusts managed by CIFC, Canyon, First Eagle, Octagon, Redding Ridge, Trinitas, Neuberger Berman and Aegon. The Mallinckrodt data in the CLO database is HERE.

The case has been assigned to Judge John Dorsey (case No. 23-11258), who presided over the debtors’ prior chapter 11. 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 advisor.

The MDT II trust is represented by Brown Rudnick LLP. An ad hoc group of holders of first lien term loans, 2025 first lien notes, 2028 first lien notes and 2029 second lien notes, the “Ad Hoc First Lien Term Loan Group,” is represented by Gibson, Dunn & Crutcher LLP. An ad hoc group of holders of first lien term loans, 2025 first lien notes, 2028 first lien notes, 2025 second lien notes and 2029 second lien notes, the “Ad Hoc Crossover Group,” is represented by Paul, Weiss, Rifkind, Wharton & Garrison LLP. An ad hoc group of holders of 2025 first lien notes, the “Ad Hoc 2025 Noteholder Group,” is represented by Davis Polk & Wardwell LLP.

Reorg reported on Aug. 23 that a non-RSA group of holders of second lien noteholders is represented by Glenn Agre.

Background / Events Leading to Bankruptcy Filing

According to the first day declaration of CRO Jason Goodson, Mallinckrodt plc’s operating subsidiaries are divided into two business segments: specialty brands and specialty generics. Specialty brands “includes innovative specialty biopharmaceutical brands” and “focuses on autoimmune and rare diseases in specialty areas like neurology, rheumatology, hepatology, nephrology, pulmonology and ophthalmology, and oncology; immunotherapy and neonatal respiratory critical care therapies; non-opioid analgesics; cultured skin substitutes and gastrointestinal products.”

Specialty generics “offers a portfolio of over twenty specialty generic product families, most of which are controlled substances regulated by the DEA.” “Within Specialty Generics, the Debtors manufacture both (a) finished dosage products, meaning the product (whether in the form of a tablet, capsule, or liquid) that the patient ultimately receives, and (b) APIs, which are then used to create finished products,” Goodson explains.

Goodson provides the following summary of specialty brands sales for 2022:

“As a result of a recent U.S. Court of Appeals decision upholding a lower court’s decision to invalidate certain patents, Specialty Brands now faces direct competition for INOmax in the U.S. market,” Goodson says, and “another company recently launched a direct competitor to the Debtor’s most valuable product, Acthar.” Further, “net sales of Amitiza experienced substantial year-over-year decline due to loss of exclusivity in the U.S.”

Specialty brands’ pipeline includes SelfJect, INOmax EVOLVE and “a label expansion opportunity” for StrataGraft, “a regenerative skin tissue therapy” used for the treatment of severe burns. “The Company is currently conducting a Phase 2 trial to evaluate StrataGraft for the treatment of adults with full-thickness burns (also referred to as third-degree burns) and a Phase 3 clinical pediatric study evaluating StrataGraft in the treatment of pediatric populations,” Goodson says.

The company is also developing SelfJect, “which is designed for easier use of Acthar Gel for patients with dexterity or vision challenges,” and “an investigational inhaled nitric oxide delivery system for INOmax gas,” which Mallinckrodt expects to launch in the United States in late 2023 (subject to Food and Drug Administration approval).

Goodson provides the following summary of specialty generics sales for 2022:

As of the petition date, the debtors and their nondebtor affiliates together employ approximately 2,700 people in the United States and abroad.

The DS includes the following simplified organizational chart for the company:

According to Goodson, the company’s latest chapter 11 filing is attributable to “significant unanticipated business developments, adverse economic conditions, and a market environment that the Company anticipates may prevent it from timely refinancing $817 million of upcoming debt maturities in 2025.”

“After emerging from the Previous Chapter 11 Cases in June 2022,” Goodson says, Mallinckrodt “had reason for optimism, having eliminated the litigation overhang that catalyzed that restructuring” and “assembled a board consisting of newly-appointed independent directors and an energized management team.” A five-year business plan review in February 2023 indicated that “the business was sustainable with renewed investment in human capital and research and development, but it would have to overcome the Company’s 2025 debt maturities and the cost of debt service and settlement obligations over the medium term.”

However, the company had at that time already suffered setbacks, including “a setback to the launch of an important new Acthar-related device, stronger competition for Acthar, a slower-than-expected rebound in Therakos sales, and a rapid rise in interest rates on the Debtors’ variable rate debt.” Specifically, Goodson explains, “the performance of certain key branded products,” including Acthar gel and Therakos, “showed softness due to product launch delays, increased competition, rising patient affordability issues and extended COVID-19 impacts.”

Goodson provides the following chart indicating declining sales of the company’s branded drugs:

“The overall decrease in net sales was primarily driven by a decrease in Acthar sales,” Goodson says, which “weakened from continued scrutiny on overall specialty pharmaceutical spending, slower-than-expected returning patient volumes impacted primarily by affordability, and the entrance and intensification of new competition.” “Acthar remains a critical product in the Company’s portfolio for both its high clinical value to patients and favorable position with prescribers; however, a robust near-term reversal in Acthar’s performance is unlikely,” Goodson admits.

Although sales in the company’s specialty generics segment increased by $53.2 million (or 16.9%) year over year to $367.5 million for the six months ended June 30, such increase “occurred during periods of market disruption, the continuation of which are not guaranteed” and was “insufficient to offset the $113.2 million decline in net sales of the Specialty Brands segment due to lower profit margins as compared to the Specialty Brands segment,” according to Goodson.

As a result, the company has continually revised guidance downwards, as summarized by a chart in Goodson’s declaration:

“All told, actual and projected performance for 2022-2024 is approximately fifty percent (50%) below expectations for that timeframe at the beginning of 2020,” Goodson says. “The Company’s actual performance for 2023, however, is in line with the latest projections.”

“While the Company continues to perform in line with its 2023 guidance, the escalation and persistence of high interest rates have absorbed increasingly more cash flow and led to the 2025 maturities looming ever larger,” Goodson says. “Each 1.0% increase in benchmark rates results in approximately $17 million of incremental interest expense for the Company, given its $1.7 billion of variable-rate debt,” Goodson notes. In March 2023, the company purchased an interest rate cap at $20 million for rate exposure on its first lien term loans.

To address these issues, Mallinckrodt pursued “strategic divestitures, liability management transactions, and ways to mitigate its interest rate exposure,” Goodson continues, but no transactions other than the hedge against rising interest rates materialized.

“Certain of the Company’s second lien notes (which are senior to the Company’s opioid liabilities and other unsecured debt) currently trade at 16 cents on the dollar, and Mallinckrodt plc’s shares of common equity have traded down from a high of approximately $25 shortly after emergence from the Previous Chapter 11 Cases to less than one dollar recently, foreclosing the opportunity to access the equity capital markets,” Goodson notes. “Based on these data points and the Company’s financial performance, the Company is presently insolvent comparing its value as a going concern to the face amount of its debt and settlement obligations.”

Goodson adds that cash outflows “are expected to deplete Mallinckrodt’s liquidity reserves over the next 12 months,” with “negative free cash flow on a levered basis continuing through 2026 driven by debt service and substantial annual opioid and CMS settlement payments.” “The Company expects to fall below the required minimum liquidity to support customary operations comfortably by the summer of 2024,” according to Goodson.

After announcing first-quarter earnings in May 2023, Goodson concludes, “robust discussions with creditors around balance sheet solutions ensued, ultimately leading to the Company’s decision to enter into the RSA and implement the restructuring transactions set forth in the RSA through these Chapter 11 Cases.”

The debtors’ largest unsecured creditors are as follows:


 














































































10 Largest Unsecured Creditors
 Creditor Location Claim Type                        Amount
Centers for Medicare
& Medicaid Services
Baltimore, Md. CMS/
DOJ/
State
Settlement Agreement
$   230,000,000
Attorney of Record:
U.S. Department of
Justice Civil Division,
Federal Programs Branch
Washington
Cotter Corp. Chicago Environmental
Claim
Unliquidated
Mallinckrodt General Unsecured Claims Trust Wilmington, Del. Contract Claim 20,000,000
California Department
of Health Services
Sacramento,
Calif.
Medicaid
Rebate
Accruals
14,454,817
AmerisourceBergen Corp. Thorofare,
N.J.
Third Party
Rebate
Accruals
7,753,088
Walgreens Boots Alliance Deerfield, Ill. Third Party
Rebate
Accruals
7,084,886
CVS Caremark Dallas Third Party
Rebate
Accruals
6,963,363
Florida Agency for
Health Care Administration
Tallahassee,
Fla.
Medicaid
Rebate
Accruals
6,872,362
Zinc Health Services Dallas Third Party
Rebate
Accruals
5,923,914
Ascent Health Services Schaffhausen, Switzerland Third Party
Rebate
Accruals
5,814,629

The case representatives are as follows:


 






















































































































































Representatives
 Role Name Firm Location
Debtors’ Co-Counsel Mark D. Collins

Michael J. Merchant

Amanda R. Steele
Richards,
Layton
& Finger
Wilmington, Del.
Debtors’ Co-Counsel George A. Davis

Anupama Yerramalli

Adam S. Ravin

Chris Kochman
Latham &
Watkins
New York
Jason B. Gott

Asif Attarwala
Chicago
Debtors’ Co-Counsel Philip Mindlin

Victor Goldfeld

Neil (Mac) M. Snyder
Wachtell,
Lipton,
Rosen
& Katz
New York
Debtors’ Investment Banker NA Guggenheim
Securities
New York
Debtors’ Financial and Restructuring
Advisor
NA AlixPartners New York
Debtors’ CRO Jason Goodson Mallinckrodt Wentzville, Mo.
Counsel to the Ad Hoc First Lien Term Loan Group Scott J. Greenberg

Michael J. Cohen

Joe Zujkowski
Gibson,
Dunn
& Crutcher
New York
Irish Counsel to the Ad Hoc First Lien
Term Loan Group
NA McCann
Fitzgerald
NA
Local Counsel to the Ad Hoc First Lien
Term Loan Group
NA Troutman
Sanders
NA
Financial Advisor to the Ad Hoc First Lien Term Loan Group NA Evercore
Group L.L.C.
New York
Counsel to the Ad Hoc 2025 Noteholder Group Darren S. Klein

Aryeh E. Falk
Davis Polk
& Wardwell
New York
Delaware Counsel to the Ad Hoc
2025 Noteholder Group
NA Morris,
Nichols,
Arsht
& Tunnell
NA
Co-Counsel to the Ad Hoc
Crossover Group
Andrew N. Rosenberg

Alice B. Eaton
Paul,
Weiss,
Rifkind,
Wharton
& Garrison
New York
Co-Counsel to the Ad Hoc
Crossover Group
NA Sullivan
& Cromwell
NA
Financial Advisor to the Ad Hoc
Crossover Group
NA Perella
Weinberg
Partners
NA
Irish Counsel to the Ad Hoc
Crossover Group
NA Matheson NA
Local Counsel to the Ad Hoc
Crossover Group
NA Landis Rath
& Cobb
NA
Counsel to the Opioid Master
Disbursement Trust II
David J. Molton

Steven D. Pohl
Brown Rudnick New York
Counsel to Acquiom Agency Services LLC and Seaport Loan Products LLC
as Co-DIP Agents
NA ArentFox
Schiff
NA
Counsel to the Non-RSA Second Lien Group NA Glen Agre
Bergman
& Fuentes
NA
U.S. Trustee Jane M. Leamy Office of the U.S. Trustee Wilmington, Del.
Debtors’ Claims Agent Benjamin J. Steele Kroll New York

Plan / Disclosure Statement

Classification and Treatment of Claims and Interests

The plan’s classes, along with their impairment status and voting rights, are shown in the chart below:

The debtors’ plan sets forth the following classification of and proposed distributions to holders of allowed claims and interests:

  • Class 1 - Other secured claims: Each holder would be fully paid in cash (including the payment of any interest required to be paid under section 506(b) of the Bankruptcy Code), receive the collateral securing the allowed other secured claim or receive other treatment that would render the claim unimpaired.

    • Estimated claim amount: $1 million to $5 million

    • Projected recovery rate: 100%



  • Class 2 - First lien claims: On the effective date, each holder would receive a pro rata share of:

    • The first lien new common equity - 92.3% of new common equity issued on the effective date - subject to dilution by the 10% MIP and the MDT II CVRs if paid in equity:

    • As applicable, cash in an amount sufficient to repay in full: (i) the first lien term loans accrued and unpaid interest in the case of any holder of first lien term loan claims, (ii) the 2025 first lien notes accrued and unpaid interest in the case of any holder of 2025 first lien notes claims, and (iii) the 2028 first lien notes accrued and unpaid interest in the case of any holder of 2028 first lien notes claims;

    • Cash from the exit minimum cash sweep if the exit minimum cash sweep trigger occurs and/or the net proceeds of the syndicated exit financing, if any, after the repayment of all applicable allowed DIP claims. The exit minimum cash sweep means Mallinckrodt collectively holding more than $160 million of unrestricted cash immediately before the effective date after accounting for implementation of the exit AR facility cash sweep and the DIP cash sweep. Cash would be swept - first to DIP claims and AR facility claims and then to first lien claims, as provided for under the plan - until the debtors collectively hold $160 million in cash.

    • If applicable, the new second-priority take-back debt, meaning the new second-priority take-back term loans or the new take-back notes, as applicable, in the event less than $1.65 billion is raised in the syndicated exit financing; and

    • Full cash payment of all outstanding first lien notes indenture trustee fees, first lien term loan administrative agents fees and first lien collateral agent fees.

    • Expected principal amount (as of Aug. 16): “$2,861,906,186.” The allowed first lien notes claims would additionally include the 2028 first lien notes make whole amount and the 2025 first lien notes make whole amount.

    • Projected recovery rate: 81% to 95%



  • Class 3 - Second lien notes claims: On the effective date, each holder would receive a pro rata share of 7.7% of the new common equity, subject to dilution by the MIP and the MDT II CVRs if paid in equity. In addition, on the effective date, the debtors or reorganized debtors would fully pay in cash all outstanding second lien notes indenture trustee fees and second lien collateral agent fees.

    • Expected principal amount (as of Aug. 16): “$650,191,952.” Allowed second lien notes claims would include accrued and unpaid interest through the petition date.

    • Projected recovery rate: 11% to 16%



  • Class 4 - General unsecured claims: Subject to plan provisions governing payments tied to assumed executory contracts and unexpired leases, each holder in cash would receive full cash payment in line with applicable law and the agreement or conditions that govern the allowed GUC, on the later of the date such obligation is due in the ordinary course of business or the effective date.

    • Projected recovery rate: 100%



  • Class 5 - Subordinated claims: Would be canceled without distribution on the effective date.

    • Estimated claim amount: Unliquidated

    • Projected recovery rate: 0%



  • Class 6 - Intercompany claims: No property would be distributed to holders under the plan. Intercompany claims would be either reinstated or “set off, settled, distributed, contributed, merged, canceled, or released.”

    • Estimated claim amount: TBD

    • Projected recovery rate: NA



  • Class 7 - Intercompany interests: No property would be distributed to holders under the plan. Intercompany interests would either be reinstated or “set off, settled, distributed, contributed, merged, canceled, or released.”

    • Estimated claim amount: NA

    • Projected recovery rate: NA



  • Class 8 - Existing equity interests: Canceled without distribution on the effective date.

    • Expected amount: NA

    • Projected recovery rate: 0%.




New Take-Back Debt

The new take-back debt term sheet attached to the RSA and disclosure statement provides for $1.65 billion in new five-year term loans and notes secured by first-priority liens on all prepetition first lien collateral. Take-back term loans issued on account of DIP loans would be treated as first out, and take-back loans or notes issued on account of prepetition first lien claims would be treated as second out. Each eligible holder of first lien claims may elect to receive either take-back term loans or take-back notes on its prepetition claims.

The first out take-back term loans would bear interest at SOFR+7.5%, with a 4.5% SOFR floor. The second-out take-back term loans would bear interest at SOFR+9.5%, with a 4.5% SOFR floor, and second-out notes would bear interest at 14.75%. The take-back term loans would amortize at 1% annually, payable quarterly.

The take-back debt would feature a make whole premium discounted at T+50 bps for the first 24 months after the effective date and a mandatory repayment/repurchase obligation with 50% of excess cash flow at a price equal to par.

MDT II CVRs

The MDT II trust CVR would be exercisable at any time prior to four years after the plan effective date and would be exercised automatically on the effective date’s fourth anniversary. When exercised, the CVR would entitle the opioid trust to receive cash from the reorganized parent equal to the market price of 5% of the new common equity (subject to dilution from the MIP), less the exercise price based on a total enterprise value of $3.776 billion, less funded debt at emergence, plus cash at exit after applicable sweeps to ABL and first lien claims.

The reorganized parent may, at its option, issue shares to the opioid trust in lieu of making the cash payment when the CVR is exercised. The number of shares issued in this scenario would be consistent with the cashless exercise provisions in the warrant issued at Mallinckrodt’s emergence from its previous chapter 11 cases in June 2022.

The CVR would be nontransferable and entitled to Black Scholes protection.

Financial Projections

The company’s projections are based on the following assumptions:

  • Overall market trends for similar branded drugs and specialty generic segments, including finished dose and API, where the company operates;

  • The impact of anticipated competitive entrants in each segment, including changes in the expected number of competitors and/or their collective impact on pricing and market shares;

  • Analysis of in-line products and existing portfolio performance; and

  • An assessment of potential, recent developments and expected product enhancements.


The company lays out specific assumptions for each of its key drugs including:

  • Acthar: Projections account for the impact of a new competitor partially offset by an assumed return to pre-pandemic prescriber and patient behavior, and the launch of a self-injector device that is expected to improve patient persistence on therapy and reduce patient and caregiver anxiety over the use of needles to administer the product.

  • INOmax: Expected to face continued price erosion and volume loss from competition during the early part of the projection period.

  • Therakos: Mallinckrodt’s focus is on solidifying its position in the ECP market within the United States while continuing to establish and expand the Therakos brand globally as it moves into new geographic markets.


Mallinckrodt says it expects EBITDA to increase to $625 million in 2027 from $463 million in 2024.

In 2024, the company’s first full year following emergence, Mallinckrodt says it expects to generate $182 million of cash from operations and spend $112 million on capital expenditures, resulting in $70 million of free cash flow. The company plans to use $31 million of FCF for debt repayment.

Capex is expected to fall to $50 million by 2026. Operating cash flow is expected to increase to $326 million by 2027.

Valuation Analysis

On the basis of the projections, Guggenheim Securities estimates the total enterprise value of the reorganized debtors to be approximately $2.7 billion to $3.2 billion, with a midpoint of $2.95 billion. After deducting pro forma net debt of $1.59 billion, Guggenheim estimates an equity value of approximately $1.11 billion to $1.61 billion, with a midpoint of $1.36 billion.

Liquidation Analysis

According to the disclosure statement, under a liquidation analysis, first lien claims would recover 72% to 90%, and second lien claimholders would not recover anything.

Management Incentive Plan

The plan provides for the reservation of 10% of reorganized equity for a post-emergence MIP.

New Board

The initial board of the reorganized parent would consist of seven members comprising the CEO of the reorganized directors, one director to be selected by the ad hoc first lien group steering committee, one director to be selected by the ad hoc crossover group steering committee and four directors to be designated by a nominating and selection committee made up of certain members of the ad hoc first lien group steering committee, the ad hoc crossover group steering committee and two members of the ad hoc 2025 noteholder group.

The reorganized board must satisfy any requirements set forth in a corporate integrity agreement between the Office of Inspector General of the Department of Health and Human Services and the parent.

The existing officers of the debtors as of the effective date would remain in their current capacities as officers of the reorganized debtors, subject to the rights of the reorganized board to remove or replace them.

Releases

The plan provides for releases of the debtors, the reorganized debtors, the nondebtor affiliates, the debtors’ and nondebtor affiliates’ current and former directors, officers and proxyholders, the ad hoc first lien term loan group, the ad hoc crossover group, the ad hoc 2025 noteholder group, the MDT II and MDT II trustees, each supporting party under the RSA (including in its capacity as a holder of equity interests, if applicable), the DIP agent, the DIP lenders, the first lien term loan administrative agents, the first lien notes indenture trustee, the second lien notes indenture trustee, the AR agent, the AR lenders, each releasing party and their related parties.

An entity would not be a released party if it elects to opt out of the releases or timely files an objection to the releases that is not resolved before confirmation. In addition, the plan includes an exculpation provision in favor of the debtors and their representatives.

DIP Financing Motion

The debtors seek approval of a $250 million term loan DIP facility, with an initial draw of $150 million available on interim approval. Participation in the DIP is available to all first lien lenders that join the RSA before an unspecified deadline prior to entry of a final DIP order. On emergence, the DIP would be either paid in full in cash or exchanged for new first priority take-back term loans (or a combination of both).

DIP proceeds may be used for working capital and for other general corporate purposes, funding of chapter 11 administrative expenses, funding of DIP interest and adequate protection payments and funding of the exit AR facility sweep, exit DIP sweep and exit minimum cash sweep.

The DIP would be secured by a first-priority priming lien on all first lien collateral, first-priority liens on all unencumbered collateral and junior liens on other assets, including avoidance actions, except that DIP collateral would not include AR covered by the debtors’ A/R facility. Interest would accrue at SOFR+8%, with a 1% SOFR floor and a 2% default premium.

DIP backstop parties would receive a backstop premium equal to 12% of total commitments as of the entry of the interim DIP order, payable in additional DIP loans.

Prepetition first lien lenders would receive adequate protection in the form of regular interest payments at the default rate, payment of fees and expenses, replacement liens and superpriority claims. Other prepetition secured lenders would receive payment of fees and expenses, replacement liens and superpriority claims.

The DIP term sheet provides for a $15 million post-termination carve-out.

The DIP term sheet requires the debtors to waive their right to surcharge prepetition lenders’ collateral under section 506(c) of the Bankruptcy Code and the “equities of the case” exception under section 552(b) of the Bankruptcy Code, effective on entry of the interim order.

The proposed budget for the use of the DIP facility is HERE. A spreadsheet available for download is HERE.

The DIP financing is subject to the following milestones:

  • Aug. 31 (three business days after the petition date): entry of the interim DIP order;

  • Oct. 17 (50 days after the petition date): entry of the final DIP order and confirmation of the plan; and

  • Nov. 26 (90 days after the petition date): emergence from chapter 11.


The lien challenge deadline is the earlier of 75 days from entry of the interim DIP order and the entry of a confirmation order. The UCC lien investigation budget is $100,000.

According to the DIP motion, the debtors’ advisors reached out to 10 potential third-party financing sources prepetition, “none of which offered to provide any postpetition financing.” Among other things, prospective lenders “expressed an unwillingness to lend on a junior basis and/or engage in a priming fight with the Debtors’ prepetition lenders as the Debtors believe that they have few, if any, unencumbered assets which could otherwise be used to secure any such postpetition financing.”

Receivables Program Continuation Motion

The debtors further seek authority to continue to sell receivables under the prepetition AR and ABL revolving facility. The agent for the facility would hold first-priority liens on the debtors’ receivables to the extent that the sale of the receivables is deemed a granting of liens rather than a true sale.

In exchange for access to liquidity under the AR facility for the duration of the cases, the originator debtors (MEH Inc., INO Therapeutics LLC, Mallinckrodt APAP LLC, Mallinckrodt ARD LLC, SpecGx LLC and Therakos Inc.) agree to “provide certain performance guarantees” and nondebtor servicer ST US AR Finance agrees to “a reduction of between $10 million and $20 million (depending on certain factors) in revolving loan availability, increases of 1% per annum in the interest rates borne by loans drawn under the Revolving Loan Facility, and modifications to the default provisions (including default rates and default loan availability) during the Chapter 11 Cases.”

The relief sought in the motion would “allow the Debtors to retain access to not less than $170 million, subject to a borrowing base tied to the Originators’ Receivables sold to ST US AR Finance, for the duration of these Chapter 11 Cases,” the debtors say.

Additionally, the AR facility agreements as amended contemplate “an exit asset-based loan facility pursuant to which the total amount of revolving loan commitments will revert back to the amount in existence prior to the 2023 Revolving Loan Agreements and the interest rates borne by loans drawn under such exit facility will be reduced by 0.50%.”

Disclosure Statement Approval Motion

The debtors’ disclosure statement and solicitation approval motion proposes the following confirmation timeline:

  • Sept. 14 at 5 p.m. ET: Voting deadline; deadline to file plan supplement;

  • Sept. 18: Deadline to file proposed confirmation order;

  • Sept. 22 at 5 p.m. ET: Plan/DS objection deadline;

  • Sept. 29 at 12 p.m. ET: Plan/DS brief deadline; and

  • Oct. 3: Combined hearing on approval of DS/confirmation of plan.


Other Motions

The debtors also filed various standard first day motions, including the following:


 

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