See below what the rationale Moody provides for the rating as well
Rating Action: Moody's assigns Ba1 to Mallinckrodt's new senior secured term loan
Global Credit Research - 15 Feb 2017
New York, February 15, 2017 -- Moody's Investors Service, ("Moody's") assigned a Ba1 rating to the new senior secured term loan due 2024 and senior secured revolver of Mallinckrodt International Finance SA and co-issuer Mallinckrodt CB LLC. Both of these entities are subsidiaries of Mallinckrodt plc (collectively "Mallinckrodt"). There are no changes to Mallinckrodt's existing ratings, including the Ba3 Corporate Family Rating.
Mallinckrodt is upsizing its revolving credit facility to $1 billion from $500 million. Proceeds from the new term loan will be used to refinance its two tranches of existing term loan B facilities. After the close of the transaction and debt repayment, Moody's expects to withdraw the ratings of the existing term loans.
Rating assigned to Mallinckrodt International Finance S.A. (co-borrower Mallinckrodt CB LLC):
Ba1 (LGD2) senior secured term loan of $1.862 billion due 2024
Ba1 (LGD2) senior secured revolver upsized to $1.0 billion due 2022
Ratings unchanged:
Mallinckrodt International Finance SA
Ba3 Corporate Family Rating
Ba3-PD Probability of Default Rating
Ba1 (LGD 2) senior secured rating
B1 (LGD 4) guaranteed senior unsecured notes
B2 (LGD 6) unguaranteed senior unsecured notes
SGL-2 Speculative Grade Liquidity Rating
RATINGS RATIONALE
Mallinckrodt's Ba3 Corporate Family Rating is supported by the company's moderate scale in specialty branded pharmaceuticals, balanced by Moody's expectation for relatively moderate financial leverage of around 4.0x debt/EBITDA. The rating is also supported by strong free cash flow and a healthy liquidity profile. The Ba3 rating is constrained by Mallinckrodt's high concentration of profits in one product, H.P. Acthar Gel ("Acthar") and in controlled substances. Acthar accounts for 40% of sales and a greater share of profits. Acthar is not protected by any patents, however, companies would face significant hurdles to get a generic version approved. The company's organic growth in 2017 will be modest driven by mid-single digit growth of its branded pharmaceuticals, driven primarily by Acthar. This will be partially offset by double digit declines in its specialty generics segment (including declines related to Methylphenidate ER). The ratings are also constrained by Mallinckrodt's aggressive appetite for acquisitions that will likely lead to increased leverage from time to time, and risks inherent in a rapidly executed business strategy. Moody's anticipates that in 2017 the company's capital deployment will be used primarily for acquisitions, with only modest debt repayment. Moody's estimates that the company has more than $800 million in cash and will have $1 billion in revolver availability upon close of the facility's upsizing.
The co-borrowers of the senior secured credit facilities are Mallinckrodt International Finance SA (MIFSA) and Mallinckrodt CB LLC. The Ba1 rating on Mallinckrodt's senior secured credit facilities reflects a security package consisting of asset pledges of the co-borrowers and guarantor subsidiaries, excluding certain principal property, as well as guarantees from substantial operating subsidiaries. The B1 rating on the unsecured notes reflects guarantees from the same subsidiaries that guarantee the obligations under the senior secured term loan facility. The B2 rating on the existing senior unsecured notes due in 2018 and 2023 reflects structural subordination, as these notes are not guaranteed by subsidiaries.
The rating outlook is stable, reflecting Moody's view that Mallinckrodt will generate good free cash flow and generally maintain debt/EBITDA around 4.0 times over the next 12-18 months. The ratings could be upgraded if Mallinckrodt maintains debt/EBITDA below 3.0x and improves its revenue diversity. Conversely, the ratings could be downgraded if debt/EBITDA is sustained materially above 4.0 times, a key product faces an unexpected material decline, or the company pursues large, debt-funded acquisitions.
Luxembourg-based Mallinckrodt International Finance SA is a subsidiary of Staines-upon-Thames, UK-based Mallinckrodt plc (collectively "Mallinckrodt"). Mallinckrodt is a specialty biopharmaceutical company with annual revenues of approximately $3.3 billion.
MSB Price at posting:
$2.74 Sentiment: Buy Disclosure: Not Held
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