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Mallinckrodt downgraded by S&P on potential for distressed debt exchange

Mallinckrodt PLC had its long-term issuer rating downgraded by S&P Global Ratings to CCC from B+ following the agency's concerns about the drugmaker's ability to access capital markets to refinance its debt.

The company could pursue a distressed debt exchange over the next 12 months if access to capital markets becomes constrained due to the perceived financial risk associated with ongoing opioid litigation, the credit rating agency said Sept. 11.

The outlook on the U.K. company, which manufactures and distributes both brand-name and generic medicines, is negative, reflecting the possibility that an opioid litigation settlement could leave the company unable to repay its 2020 debt maturity when it comes due.

The drugmaker's shares were down almost 16% to $3.27 as of 12:19 p.m. ET.

Mallinckrodt reached a proposed settlement worth $30 million with two Ohio counties in connection with opioid lawsuits. The amount of the settlement exceeded S&P's expectations, the rating agency said.

Mallinckrodt is reportedly considering options of restructuring and even bankruptcy to help with the possible legal liabilities over the opioid litigation against the company. Moody's downgraded Mallinckrodt's corporate family rating to Caa1 from B2 and its probability of default rating to Caa1-PD from B2-PD.

"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," the rating agency wrote.

Plaintiffs in the opioid lawsuits, which involve other drugmakers including Johnson & Johnson and Endo International PLC, appear to be more focused on the overall volume of opioids sold instead of on how the medicines were marketed, and Ratings said it believes Mallinckrodt sells the largest volume in the U.S.

The ratings agency said it sees risks to Mallinckrodt's plan to use free cash flow to repay its April 2020 maturities, particularly if the company enters into additional settlements or is required to make a large repayment to the U.S. government related to past sales of the Acthar gel, which is used to treat conditions including lupus and infantile spasms.

Mallinckrodt continues to generate positive free cash flow, Ratings said. On Sept. 10, the drugmaker said it agreed to sell its wholly owned subsidiary BioVectra Inc. to H.I.G. Capital LLC for up to $250 million.

"Any cash is good cash at this point," SVB Leerink analyst Ami Fadia wrote in a Sept. 10 note. "We see the BioVectra sale as a necessary move to prepare for a worst case scenario in the near-term with a court decision on the [Centers for Medicare and Medicaid Services] Medicaid treatment on Acthar looming."

This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings. Descriptions in this news article were not prepared by S&P Global Ratings.