It’s not uncommon for senior creditors of a distressed company to push back when a cheque is about to be issued to parties holding junior claims. After all, those claims are usually worthless and the cash is better spent staying within the company’s coffers, reserved for top creditors who eventually take ownership in a restructuring. However, what happens when those junior creditors are victims of the US opioid crisis rather than aggressive hedge funds? This was the question raised by pharma company Mallinckrodt in a regulatory filing last week, as its lenders and bondholders asked the board to consider alternatives to making a mid-June, $200mn payment to a trust responsible for compensating parties allegedly harmed by opioids produced and marketed by the company.
It’s worth noting that the company is scheduled to pay a total of $1.725bn, with payments running through 2028. These payments were created as part of a global settlement enacted last year after Mallinckrodt filed for bankruptcy in 2020 to address its financial troubles and legal liabilities. However, since its reorganisation, the business has struggled under a heavy burden of $3.5bn in debt. The separate trust payments, which are unsecured and ranked junior to Mallinckrodt’s loans and bonds in the creditor structure, have some debt holders pushing back against the payout prior to another company restructuring, either inside or outside of bankruptcy court.
In May, lawyers for opioid victims warned in a letter to the company board about the dangers of reneging on its obligations, stating that it could leave “blood on your hands.” Mallinckrodt has struggled to deal with its mounting liabilities, which were a result of a flawed strategy and under-performance in business. When the company was trying to restructure in 2021, it wrote in court papers that its case was the “first-ever reorganisation of a defendant in the nationwide opioid litigation that will not come to be owned by opioid claimant trusts.”
Companies facing mass tort liabilities usually turn to the US bankruptcy court as it provides an efficient method for resolving disputes, letting victims receive economic redress, while businesses can protect themselves from endless litigation. The Mallinckrodt bankruptcy deal was settled by thousands of parties, including US states and municipalities, individual victims, as well as holders of leveraged loans and junk bonds. But the company’s rapid unravelling can be attributed to both misfortune and the misguided confidence that there could be enough money in the pot to minimise the pain on both financial creditors and victims of wrongdoing.
In March, analysts at CreditSights said that the opioid settlement, an unsecured obligation, would “arguably be dischargeable in a bankruptcy.” However, if senior creditors attempt such a gambit, it may not be so straightforward given the highly politicised nature of the opioid epidemic. If Mallinckrodt struggles to satisfy its obligations to the opioid trust, it could mark an embarrassing Chapter 22 case, where a company emerges from Chapter 11 and then fails to recover further. But in this case, anger and anguish would surely ensue if opioid victims suffered further.
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