Mallinckrodt (NYSE: MNK) stock jumped 435% one Friday a couple of weeks back. On the idea that perhaps something clever could be done about that payment it has to make into the opiates settlement just coming up. On the other hand, as the WSJ reported, perhaps it won't be able to do something clever and will declare bankruptcy once again. It's even possible that the treat of doing that is the clever thing to be done. For while a Chapter 11 bankruptcy would almost certainly preserve the necessary payments into the settlement fund it's not obvious that such flows of funds would be privileged in a Chapter 7. And while privileged not necessarily fully preserved in a Chapter 11.
As we pointed out elsewhere: “But, and there's the thing, any substantial earnings for some years are to go to the compensation fund. So, there's not really any equity around – or no value in the public equity that is. Friday morning the MNK market capitalisation was around $13 million. Yes, with an m. Which for a company doing near half a billion of sales a quarter isn't much. True, it's also losing about $250 million a quarter but still. We've a pretty large business perched atop a tiny equity valuation.”
So, we've a large business, perched atop a tiny equity valuation. With the major problem being paying into that opiates compensation fund.
Mallinckrodt stock price from NASDAQ
So what's really happening here is that the $200 million payment into the compensation fund is about to become due. Mallinckrodt sorta has it but also sorta doesn't - it won't have much working capital, that's obvious, if it does make the payment. So, making the payment would, if not actually bankrupt it, at least make it very, very fragile financially. So there's a good case for not making the payment. The compensation fund clearly doesn't want that - but if Chapter 11 happens then it might not get the $200 million and any further payments in the future become even more unlikely.
The net effect of all of this is that Mallinckrodt equity is an option on how those settlement talks are going to go with the compensation fund. The outcome really isn't going to be being able to waive the payment - the fund might as well sue and drive into Chapter 11 at that point. But it may or may not be that the full payment should be made on time.
That's what the bet is and for those of us outside the American legal profession it almost simply is a bet one way or the other.
