MNK 10 04/15/25

Publicly traded companies mentioned herein: American Airlines Group Inc (AAL), Humana Inc (HUM), Mallinckrodt PLC (MCD GR)

Highlights

The presenter is long the Mallinckrodt PLC 10% first lien notes, currently trading at 106, in what he described as a litigation-themed special situation. The presenter describes the situation as one where an investor is being paid a roughly 5-6% yield while a 22 point make-hold provision litigation continues and could result in significant premium to the first-lien holders. 

The presenter described the notes as “overly secure” with very little downside risk. The only real risk now is that the bonds are called, perhaps as early as spring 2022. 

Holders of these notes possess so-called make-whole call protections, which means that rather than this being a litigation finance situation with a cost, it’s instead a situation where the investor is being paid 5-6% yield on the 10% coupon notes to wait out the outcome of the case. There is potentially as much as 22 points of make-whole provision being fought over in the litigation.

Background on Mallinckrodt: The company filed for bankruptcy in October 2020 with $5.3 billion in debt to resolve widespread litigation brought by states, local governments and private individuals accusing the company of deceptively marketing opioids.

In a significant chapter of the Mallinckrodt bankruptcy and related antitrust litigation, the company defeated the claims of health insurers' Humana (HUM) and Attestor Limited in a Delaware US Bankruptcy Court decision on Dec. 06. The insurers’ claims accused the drugmaker of engaging in anticompetitive practices to inflate the price of one of its top products, Acthar Gel.

US Bankruptcy Judge John Dorsey ruled that the insurers failed to show that the high prices of Acthar were the result of illegal maneuvering by the company. Those claims had been a risk weighing on the bondholders. That risk is now off the table. 

To own the first liens from here, the presenter believes it’s not necessary to have any view on the company or their products whatsoever at this point. He describes the first liens as an overly secure note with an estimated 50-60% LTV. 

Because this is an outcome of the bankruptcy court, the bond value will likely not decline lower than the call price of 105. It is possible that the bonds are called. There’s an April 2022 105 call and then a later call from there. Regardless, the presenter views the risk/reward from here as 1 point of downside (106 to 105 call) vs. 22.5 points of make-whole upside in the continuing litigation with the company/ other creditors. 

First lien creditors (including the presenter) previously litigated the make-whole claim in the bankruptcy court and lost in what the presenter described as an expected decision given the judge’s inexperience with such provisions. The consequence of losing is that the judge reinstated the bonds to where they are valued today. 

The potential upside from here comes from the appeal of that decision to US Third Circuit, where Judge Thomas Ambro is expected to review the decision. The presenter is extremely bullish on the appeal given it landed on Ambro’s docket. The presenter describes Ambro as a first lien creditor’s lawyer who has demonstrated very serious respect for secured creditor rights in prior cases. 

The presenter has significant experience in these make-whole premium situations including those for Texas power companies Calpine and TXU Energy, as well as American Airlines (AAL). The presenter describes the make-whole provision language in Mallinckrodt as potentially the strongest/most favorable he has seen for first lien creditors.

The next step in the process involves the bankruptcy court confirming the win against Attestor/Humana. That is expected this month or in January. The duration of the trade will depend on whether they take the first lien holders out in April 2022 or not. Assuming the bonds are not called, the upside here involves the make-whole provision appeal—likely a 2-3-year process. That entire time, investors can expect to be collecting the 10% coupon.