@Anjo-Roche,
There's a saying that a little bit of knowledge can be a dangerous thing and, respectfully, I think it applies in the case of your post.
You see, a set of financial statements is exactly that - as set. As such, to really understand what is going in with the financials of a business, one needs to read
all the financial statements in conjunction with one another.
What your exercise has done is to consider only certain selected elements of the balance sheet, without the requisite attention to what is going on in the statements of profits/losses and cash flows.
When analysing a business from a financial standpoint, one needs to not just look at a financial
snapshot at any given point in time, but one needs to evaluate how that financial snapshot is
changing over time and - importantly - the rate at which the financial position is changing (the second derivative of the financial position, if you like).
What you have done is look only at the financial snapshot, but not how it is changing (nor the rate of that change).
Here's what I mean: the nub of your argument is that most of MNK's debt is non-current and therefore only needs to be repaid in the outer years.
While,
prima facie, that is true, what your statement overlooks is that is not necessarily the case. Also, your statement omits to account for the underlying dynamics of such borrowings.
You see, commercial lenders are a bit smarter (and greedier) than simply adopting a hands-off approach of, "
Sure, Corporation XYZ, we'll lend you billions of dollars for which all you have to do is make annual interest payments to us, and we won't give our mutual arrangement another thought until we hear from you in 2022 when its time for you to give it back to us".
On the contrary, what commercial lenders do is they say, "
OK, we'll lend you the money for 5 years, but we're going to keep a close watch on you, and the minute you go beyond certain mutually agreed financial boundaries, then we are liable to get scared quite quickly and you will need to give our money back right there and then."
So, while you see only the "snapshot" of the financial position, here's what the credit analysts employed by MNK's commercial lenders see:
Firstly, looking at the trends in
Revenue over the past few quarters (all figures in US$m):
JQ 2016: 971
SQ, 2016: 887
DQ, 2016: 830
MQ: 2017: 811
Similarly, for
Gross Profit:
JQ 2016: 541
SQ, 2016: 490
DQ, 2016: 446
MQ: 2017: 419
and
Operating Income:
JQ 2016: 217
SQ, 2016: 155
DQ, 2016: 162
MQ: 2017: 110 [*]
[*] Note: MNK actually reported Operating Income of $90m, but there were four non-recurring items for which adjustments to the reported Income Statement needed to be made, viz. credits of: 1) $69.2m charge due to the termination of defined benefits plan, and 2) $17.2m of restructuring charges, offset by two required debits of 1) $59.1 of profit on divestment and $7.5m of "other" expense which was booked below the Operating Income line.
An easier way to view MNK's deteriorating financial performance over the past 12 months is to base its salient P&L line items in JH2016 to 100, and then to relate the subsequent changes in these line items to that starting base.
Here goes:
Revenue / Gross Profit / Operating Income (JH2016 = 100):
JQ 2016: 100 / 100 / 100
SQ, 2016: 91 / 91 / 71
DQ, 2016: 85 / 82 / 75
MQ: 2017: 84 / 77 / 50
As can be seen, MNK's last-reported Revenue is 84% of its level 12 months ago and - due to the operating leverage in the P&L - Gross Profit is 77% of its JH2016 level and Operating Income has halved.
Why is this adverse trend important to lenders to MNK?
Well, the thing that is of critical importance to lenders is that- when they lend money - they are assured of getting it back (otherwise, they go out of business). And the key thing they look at when they assess the risk of them not getting their money back is the extent to which the interest on the money being lent out is covered by the profits of the business.
In MNK's case the trend in the ability of the company to services its borrowing costs looks as follows:
Operating Income - to - Interest Expense
JQ 2016: 2.28
SQ, 2016: 1.78
DQ, 2016: 1.65
MQ: 2017: 1.18
Debt Payback Period (Net Debt-to-Pretax Profit) [YEARS]
JQ 2016: 12
SQ, 2016: 20
DQ, 2016: 24
MQ: 2017: 86
Twelve months ago, MNK's earnings were double the company's interest expense; today these two figures are not too dissimilar to one another. And twelve months ago, the theoretical debt payback period (using Pre-Tax Earnings, so assuming a zero percent tax regime) was a satisfactory 12 years. Today, it has blown out to more than 80 years.
Knowing commercial lenders like I do, that sort of rate of change in the financial health of a company would give them cause to sleep far less easily at night.
And even before this last result, I am certain MNK's bankers would have - during the regular credit review meetings it has with MNK management - expressed concern about the solvency deteriorating trends. And I suspect that the sale of the Nuclear Imaging business had a lot to do with an attempted remedy of the situation.
And note that this is all happening when the bulk of MNK's debt would be at interests rates that were struck during 2015 and 2016, period of record-low interest rates in the US. As you yourself say, the current debt attracts a rate of just 1.8%. As the company's debt gets refinanced, it sure as heck won't be at those sorts of bargain basement rates. The line of credit, as a case in point, is virtually twice as expensive as the company's current debt.
The company's earnings can barely cover the interest cost which was set at historical low levels; how will MNK possibly fare as its debt becomes progressively more expensive over the coming quarters?
Don't get me wrong here; I'm not saying that a deal with MNK is not possible. It's just that MNK are not in a financial position to enter into any deal that will greatly enrich MSB, as some might be expecting.
PS.
Just one important correction to an error made in your post.
You posted the following:
Liabilities $Bn $Bn
Current Liabilities: 31/3/17 31/3/16
Current maturities of long-term debt $ 244.9m $ 271.2m
Long-term debt $ 5,699.9bn $5,880.8bn
Total $5,944.8bn $6,152.0bn
These figures correspond to 31/3/2017 and 30/12/2016 (and not 31/3/2016, as you posted)
In your post you also said the following
- "Total Debt Reduction of $207.2m during the above period"
Yes, Gross Borrowings fell by $207m, but the Cash Balance also fell, by $82m (from $342m @ 30/12/2016 to $260m @ 31/3/2017), meaning the Net Debt fell by $125m (which is not as flattering as the $207.2m gross debt reduction figure.
But also, in this context, you have failed to mention that the company received $577m during the period from divestments (principally the Nuclear Imaging business); so when one considers that, then the mere $125m in net debt is not at all a good outcome, I wouldn't have thought, and I suspect MNK's bankers would be thinking much the same.
What was it that you were saying about some people who "
like to give only the headlines .... but never the detail"?
(20min delay)