Mallinckrodt Specialty Generics Business, But No Other Entities, to File Chapter 11 in ‘Coming Months’ to Implement Global Opioid Settlement; Company Enters Into Debt Exchange Support Agreements and Backstop for New $800M TL

Relevant Documents:
Opioid Settlement Release
Support & Exchange Agreement
Lender Agreement 8-K

This morning, Mallinckrodt announced in a press release that it has reached an agreement in principle on the terms of a global settlement that would resolve all opioid-related claims against the company, specialty generics-focused subsidiaries, including SpecGx LLC, and the company's other subsidiaries. The agreement in principle has been reached with a court-appointed plaintiffs' executive committee representing the interests of thousands of plaintiffs in the opioid MDL, and is supported by a broad-based group of 47 state and U.S. territory attorneys general.

To implement the proposed settlement, the company expects that its specialty generics business, which manufactures certain generic opioid products, among other products, will file voluntary petitions under chapter 11 of the U.S. Bankruptcy Code in the coming months. Mallinckrodt plc and its specialty brands-related subsidiaries would not be part of the chapter 11 filing.

Additionally, as described in further detail below, the company has entered into a support agreement with certain term lenders and noteholders, as new lenders, to amend its credit agreement to allow for a new four-year $800 million term loan, the proceeds of which would be used to repay the outstanding 4.875% notes due April 2020 “and additionally to partially repay loans and terminate corresponding commitments under the revolving credit facility in respect of revolving lenders who agree to extend their loans and commitments to March 2024.” Pursuant to a separate exchange agreement, certain senior noteholders have agreed to tender their 5.75% 2022 notes in exchange for new 10% second lien notes due April 2025. To the extent the exchange offer is not fully subscribed, these senior noteholders have also agreed to exchange 5.625% notes due October 2023 for the 10% second lien notes due 2025 for 90 cents on the dollar.

The support and exchange agreement was reached with noteholders Aurelius Capital Master, Ltd., Franklin Advisers, Inc. and Capital Research and Management Company. These funds are also lenders under Mallinckrodt’s credit agreement and in addition to other lenders named below are signatories to the support agreement for the proposed credit agreement amendment and new loan agreement.

Opioid Settlement

The company’s court-supervised chapter 11 process is expected to lead to the creation of a trust which, among other things, would establish an abatement fund to offset the expense of helping to combat opioid addiction and providing support to communities impacted by opioid abuse. It is expected that Mallinckrodt plc would receive the benefit of a "channeling injunction" that would provide for the “nonconsensual release” of all opioid-related claims that have been or could have been asserted against Mallinckrodt plc or its subsidiaries related to Specialty Generics' manufacture and sale of opioids prior to the time the Specialty Generics chapter 11 plan becomes effective.

Mallinckrodt would retain ownership of the specialty generics business, which would be referred to as SubCo, upon emergence and would continue to evaluate “strategic options” for the specialty generics business upon emergence from chapter 11.

Under terms of the proposed settlement, plaintiffs would receive structured payments of $1.6 billion as described below:
 

• $300 million to be received upon emergence of the Specialty Generics business from chapter 11;
   
• $200 million to be received on each of the first and second anniversaries of emergence;
   
• $150 million to be received on each of the third through eighth anniversaries; and
   
• Warrants exercisable at $3.15 per share to purchase ordinary shares representing approximately 20% of the company’s fully diluted outstanding shares including the warrants.

Additionally, the term sheet states that following a sale of SubCo, or a material portion of assets, 50% of any net proceeds remaining after compliance with Mallinckrodt’s debt documents would be applied to reduce future deferred cash payments. However, the term sheet states that Mallinckrodt is under no obligation to sell SubCo “in any particular timeframe.”

Support Letter and Settlement Term Sheet

Attached as an exhibit to the 8-K is a letter listing the 47 states and territories, in addition to the court-appointed plaintiffs’ executive committee in the opioid MDL, as claimants supporting the resolution of opioid claims against Mallinckrodt through a chapter 11 of the specialty generics segment. New York is not listed as one of the states supporting the settlement. A liability trial on the public nuisance claims of the state of New York, Nassau County and Suffolk County trial is currently set to begin March 20; the defendants have appealed Judge Jerry Garguilo’s denial of their request to continue the trial to a later date. As noted below, one of the conditions to the settlement is that the New York State suit is “coordinated” to allow time for “pre-packaged/pre-arranged chapter 11 cases.”

The term sheet details the $1.6 billion in structured payments to be received by plaintiffs under the settlement and also provides additional details regarding the trust mechanics:
 

•  Opioid-related claims against third parties would be contributed to the trust, subject to protections to be negotiated to minimize any potential adverse impact on the company from the trust’s pursuit of such claims.
   
• The term sheet indicates that the contribution to the trust of “insurance coverage potentially applicable to opioid claims to be discussed and agreed.”
   
• The term sheet clarifies that the settlement consideration will go into the trust (for the benefit of opioid plaintiffs), which will own and control distribution of cash, parent equity, and contributed claims.

The term sheet includes the following plaintiff and opioid litigation related conditions to the settlement:
 

•  Supermajority support and participation among opioid plaintiffs, including a future claims representative (if one is reasonably determined to be necessary by the company, in consultation with the AHC), on terms satisfactory to the company;
   
•  Resolution of potential DOJ civil and criminal claims against the company on reasonable terms;
   
• Coordination of N.Y. state suit to allow time for pre-packaged/pre-arranged chapter 11 cases;
   
•  Company to agree to injunctive terms satisfactory to the company governing the sale and distribution of opioids, binding on SubCo and any buyers thereof (or successors thereto);
   
• A subset of company’s litigation documents to be made publicly available as part of an industrywide document disclosure program, subject to scope and protocols to be negotiated by the parties’ informed representatives; and
   
•  Treatment of potential third-party indemnification claims satisfactory to the company and the AHC.

The term sheet also notes additional conditions to the settlement related to the consumption of the exchange transactions discussed below.

Additional “implementation mechanics” discussed in the term sheet include that:
 

• All other claims against and equity interests in the SubCo subsidiaries will be unimpaired under a chapter 11 plan and all contracts will be assumed; and
   
• A channeling injunction be put in place and that the plan would provide for the nonconsensual release of all existing and future opioid-related claims for the benefit of parent and all its subsidiaries (including SubCo entities) and their respective directors, officers, managers, employees and other customary related parties.

The term sheet explains that these mechanics must “preclude assertion against the Company of potential third-party indemnification claims” and would include carve-outs “as necessary to preserve insurance coverage.”

Support and Exchange Agreement

Additionally, Mallinckrodt announced that it has entered into a support and exchange agreement with Aurelius Capital Master Ltd., Franklin Advisers Inc. and Capital Research and Management Co.

Through the support and exchange agreement, the company has agreed to:
 

• Commence, by no later than March 20, a private offer to exchange any and all of the 5.75% senior notes due 2022 for new 10% second lien senior secured notes due 2025, at a rate of $1,000 of new notes for every $1,000 of existing 2022 notes exchanged; and
   
• Commence, by no later than March 20, a solicitation of consents from holders of 5.75% senior notes due 2022 to certain amendments to eliminate or waive substantially all of the restrictive covenants contained in the notes and the applicable indenture, and eliminate certain events of default, modify covenants regarding mergers and the transfer of assets, and modify and eliminate certain other provisions, including covenants regarding future guarantors and certain provisions relating to defeasance.

The closing of this exchange offer is conditioned on, among other things, the absence of events materially and adversely affecting the ability to implement the litigation settlement discussed above, and the funding of $800 million in new term loans and the effectiveness of an amendment to the company’s existing credit agreement, each as discussed below.

The funds that are party to the exchange agreement have agreed to tender all of their 5.75% senior notes due 2022 in the exchange offer, deliver their consents in the consent solicitation and, if the aggregate principal amount of new notes issued pursuant to the exchange offer is less than $610.3 million, the “exchange cap,” exchange their 5.625% senior notes due 2023 for an amount of new 10% second lien senior secured notes due 2025 that is equal to the excess, if any, by which the exchange cap exceeds the aggregate principal amount of new notes to be issued pursuant to the exchange offer, at a rate of $900 of new notes for every $1,000 of 5.625% senior notes due 2023 exchanged. The funds collectively hold approximately $271 million aggregate principal amount of the 5.75% senior notes due 2022 and approximately $255 million aggregate principal amount of the 5.625% senior notes due 2023. After an exchange completed in December, $610.3 million of 5.75% 2022 notes and $514.7 million of 5.625% 2023 notes were outstanding.

Additionally, the 8-K indicates that the funds above have consented, in their capacity as holders of the 4.875% senior notes due 2020, to the adoption of an amendment to the 2020 notes to provide for the reduction of the optional redemption notice period from 30 days to three business days.

New Term Loan and Credit Agreement Amendment Support Agreement

Mallinckrodt entered into a separate support agreement with Aurelius, Franklin and Capital Research and Management as well as certain existing term lenders under Mallinckrodt’s credit agreement whereby the parties have agreed to make “good faith efforts” to enter into an amendment to the existing credit agreement and are subject to certain conditions including: “(i) the consent by certain thresholds of the existing term lenders and revolving lenders, “which condition has not yet been satisfied as of this date” and (ii) the commencement of the 2022 notes exchange offer (emphasis added).

According to the support agreement, lender parties include Glendon Capital Management, Redding Ridge Asset Management, CIFC Asset Management, Octagon Credit Investors, Marathon Asset Management, Nuveen, Symphony Asset Management, Eaton Vance, PGIM, First Eagle, Neuberger Berman, Centerbridge and BlackRock, as well as the parties listed above: Aurelius, Franklin and Capital Research.

New Term Loan

Certain lenders and noteholders have agreed to backstop a new $800 million senior secured term loan facility which would bear interest at L+6.5%. The new loans would amortize at a rate of 5% per year, with the remaining amount maturing in four years. Backstop lenders would be paid a fee of 2%, and lenders for the new loan would also be paid a fee of 2% of their commitments. Proceeds would fund the repayment of all $614.8 million of principal on the company’s 2020 notes and a partial repayment of the revolver on or prior to March 20 for those that agree to extend their loans and commitments to March 2024.

According to the support agreement, each of the funding term lenders has agreed to consent to the amendments.

The backstop group, consisting of an ad hoc group of existing first lien lenders, would fund $400 million of the new loan, with the remaining $400 million allocated to specified noteholders. However, the portion allocated to the backstop group would be offered to all existing first lien lenders pro rata, according to the term sheet.

The new loans would have a first priority lien on (i) existing secured debt collateral, including, without limitation, a guarantee from and a pledge of all the assets of the SpecGx subsidiaries; (ii) pledges of the stock of specified first-tier foreign subsidiaries not otherwise pledged for the benefit of the existing credit agreement debt and the new term loan.

Amendment

Mallinckrodt requests certain changes to the existing credit agreement including changing the 5x net leverage covenant to a 4x first lien net leverage covenant, with EBITDA including the SpecGx entities. The company is also requesting a going-concern waiver. Additional amendments to debt and lien incurrence, restricted payments and permitted investments are included in the term sheet.

For the amendment, Mallinckrodt is offering a consent fee of 50 basis points and an increase in the applicable margin by 100 basis points.

Specialty Generics Segment Financials

Mallinckrodt provided the following financials for the total company and the specialty generics business.