Mallinckrodt (NYSE: MNK) stock was up 186% yesterday. The valuation of MNK stock is, currently at least, based upon whether they're going to pay the money into the opiates settlement fund or not. If not then the value of the stock is higher, obviously. But there are gradations of even that - if the settlement fund is no longer a privileged creditor then Mallinckrodt is worth more and so on.
As we've said before there's a certain dance of calculation going on at Mallinckrodt:”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. “ That opiates compensation fund wants the money due, obviously, But pushing MNK into bankruptcy by demanding it might not work. As the FT says: “The consequence is that there is simply not enough money to satisfy the obligations to the opioid trust.”
Another bankruptcy might well see such junior claims diminished, even - in theory at least - wiped out.
Mallinckrodt share price from NASDAQ
Now, if it's possible to cut off the settlement payments in that manner, perhaps it's possible to do so in another. This this: “Mallinckrodt, a specialty drugmaker whose U.S. unit is based in St. Louis, is reportedly in discussions with hedge funds about again filing for bankruptcy to cut off about $1 billion in payments meant to assist people with opioid addiction.” Go into Chapter 11 again, dump the settlement costs and be worth more on coming out.
Or as the WSJ puts it: “As part of a prearranged deal with the hedge funds, Mallinckrodt would propose to write off more than $1 billion from what it still owes to addiction victims and state and local governments, the people familiar said. The funds believe that Mallinckrodt promised too much when it agreed to the settlement, according to people familiar with the matter, and that the company's money first belongs to senior lenders like themselves, not to addiction victims or state governments.”
That would aid the operating unit we call Mallinckrodt, certainly, being free from that $ billion. Quite how it would aid current equity holders is another matter. For another Chapter 11 would, presumably, wipe out the current equity. It's therefore possible that people are getting confused here. Not paying the opiates settlement would benefit the business, sure, but not current equity holders.
Or perhaps the calculation is that by threatening to do this then better terms can be achieved without the Chapter 11?
Whichever way around the argument runs we'd just note that this is undoubtedly a very speculative position. For the equity is rising on the threat to make the equity worth nothing.
