Mallinckrodt plc announced that the Company and its specialty generics-focused subsidiaries Mallinckrodt LLC, SpecGx LLC and certain other affiliates (collectively, "Specialty Generics") have reached an agreement in principle on the terms of a global settlement that would resolve all opioid-related claims against the Company, Specialty Generics, 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 multidistrict litigation1, and is supported by a broad-based group of 47 state and U.S. Territory Attorneys General.
Under the terms of the proposed settlement, which would become effective upon Specialty Generics' emergence from a contemplated Chapter 11 process, subject to court approval and other conditions:
Plaintiffs would receive $1.6 billion in structured payments, of which $300 million would be received upon Specialty Generics' emergence from the completed Chapter 11 case, $200 million would be received on each of the first and second anniversaries of emergence, and $150 million would be received on each of the third through eighth anniversaries of emergence. The substantial majority of those payments are expected to be contributed to a trust which, among other things, would establish an abatement fund to be administered to cover the costs of opioid-addiction treatment and related efforts.
Upon Specialty Generics' emergence from the contemplated Chapter 11 process, the trust would receive warrants, exercisable at $3.15 per share, to purchase ordinary shares that would represent approximately 19.99% of the Company's fully diluted outstanding shares, including after giving effect to the exercise of the warrants.
Specialty Generics would abide by certain agreed-upon operating covenants.
To implement the proposed settlement, the Company expects that Specialty Generics, 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. This court-supervised 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. The court-supervised process is also expected to provide a fair, orderly, efficient and legally binding mechanism to resolve all opioid-related claims against the Company, Specialty Generics, and all of Mallinckrodt's other subsidiaries and related entities. It is expected that Mallinckrodt plc would receive the benefit of a "channeling injunction" that would provide for the 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 and all of its subsidiaries, including Specialty Generics, are operating as normal and are expected to continue operating normally throughout the court-supervised process contemplated for Specialty Generics. The Company currently expects that Specialty Generics would continue to be an indirect, wholly owned subsidiary of Mallinckrodt plc during and following emergence from the contemplated court-supervised process. Upon emergence, the Company will continue to evaluate strategic options for the Specialty Generics business.
Related Debt Refinancing Activities
The Company and certain of its subsidiaries have entered into a support agreement with certain of its existing term lenders, as well as certain of its existing noteholders, as new lenders, relating to an amendment to the Company's existing credit agreement on terms consistent with an agreed term sheet.
Conditions to the effectiveness of the amendment include, among other things, (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 an exchange offer with respect to the Company's 5.750% senior notes due August 2022 (the "2022 Notes"), pursuant to the exchange agreement (as described below).
The amendment, if effected, would provide for a new $800.0 million term loan with a four-year term and would implement certain other amendments on the terms described in the term sheet.
The proceeds of the new term loan will be used to fund the redemption or repayment of all of the Company's outstanding 4.875% senior 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.
The amendments to the existing credit agreement would provide for, among other things, certain changes to the covenants, including the financial covenant, a rate increase of 100 basis points for existing term loans, and an increase in amortization on the existing term loans.
Although the term sheet relating to the proposed settlement had included a reference to the Company making an exchange offer for its 2020 notes, the Company currently plans to enter into the amendment and to use the proceeds of the new term loan thereunder to refinance its 2020 notes, in lieu of any exchange offer for the 2020 notes.
In addition, pursuant to a separate exchange agreement, certain senior noteholders have agreed to tender their 2022 Notes in exchange for new 10.000% second lien notes due April 2025 ("2025 Notes"), on a par-for-par basis, pursuant to an exchange offer that would be commenced by certain subsidiaries of the Company. To the extent the exchange offer is not fully subscribed, these noteholders have also agreed to exchange 5.625% senior notes due October 2023 held thereby (the "2023 Notes") for such 2025 Notes, at a rate of 90 cents of 2025 Notes for every dollar of 2023 Notes.
Mark Trudeau, President and Chief Executive Officer of Mallinckrodt, said, "Reaching this agreement in principle for a global opioid resolution and the associated debt refinancing activities announced today are important steps toward resolving the uncertainties in our business related to the opioid litigation. Importantly, when finalized, we believe the proposed settlement and capital restructuring activities will provide us with a clear path forward to achieving our long term strategy, preserving value for our financial stakeholders and providing us with the flexibility to operate effectively."
Trudeau continued, "In spite of the uncertainties impacting the business, we have continued to deliver strong earnings and cash flow as evidenced by our fourth quarter and 2019 results issued today. These results reflect the strength of both Specialty Brands and Specialty Generics and underscore our vision for the future of these businesses. Our pipeline continues to build momentum, with the expected filings of terlipressin and StratGraft® in the coming months, as well as the completion of key clinical study results and data readouts across the portfolio. Looking ahead, we remain focused on our vision to develop and bring to market innovative therapies for underserved patients with severe and critical conditions."
Latham & Watkins LLP, Ropes & Gray LLP and Wachtell, Lipton, Rosen & Katz are serving as counsel, Guggenheim Securities LLC is serving as investment banker and AlixPartners LLP is serving as restructuring advisor to Mallinckrodt. Latham & Watkins LLP is serving as counsel, AlixPartners LLP is serving as restructuring advisor, and PJT Partners, Inc. is serving as investment banker to Specialty Generics.