Mallinckrodt Intl Finance SA: Files Chapter 11

The long projected bankruptcy filing of Mallinckrodt PLC and many of its subsidiaries (including Mallinckrodt Intl Finance SA) has finally occurred on October 12, 2020. Our last article on September 28 had called out a likely filing, but the BDC Credit Reporter has been mentioning the high likelihood of this move since September 2019. Bankruptcy is accompanied by a huge and highly complex restructuring agreement affecting creditors, plaintiffs and other interested parties. However, from our perspective the most important news is the following statement in the company’s press release about the restructuring:

All allowed First Lien Credit Agreement Claims, First Lien Note Claims and Second Lien Note Claims are expected to be reinstated at existing rates and maturities

From what we can tell, the only BDC with exposure is publicly-traded Barings BDC (BBDC), which has invested $3.2mn in first lien debt due in 2024. Based on the above, we expect that no loss is forthcoming. As of June 2020, BBDC carried the debt at a (25%) discount. That is likely to get reversed if and when the restructuring plan is implemented as envisaged. The valuation is likely to be increased in the IIIQ 2020 results when published but a final resolution will have to await what might be a relatively short trip through the bankruptcy process. It’s also possible that BBDC has already sold this position and all the above is moot. In its most recent conference call BBDC did admit to trading out of these large cap, liquid positions where other troubled names were concerned. Maybe Mallinckrodt was on the list…

We are downgrading the company from CCR 4 to CCR 5 for the moment, but may upgrade to CCR 3 – or even CCR 2 – when the bankruptcy process is complete. The company is removed from the Weakest Links list of companies expected to default. As we’ve said in earlier updates, this bankruptcy will be big news in the broader financial markets but is of little importance in the BDC sector given the very modest, single BDC, exposure and at the top of the capital structure.