In December Mallinckrodt (MNK) announced its $1.2 billion acquisition of Sucampo Pharmaceuticals. The transaction was not well-received by S&P, which affirmed the company’s below investment grade rating of Mallinkrodt’s debt:

S&P Global Ratings today affirmed its ‘BB-‘ corporate credit rating on Mallinckrodt Plc and all issue-level ratings except for one recovery rating. We also removed the ratings from CreditWatch, where we placed them with negative implications on Dec. 29, 2017. The outlook is negative …

Today’s rating actions reflect our expectation that Mallinckrodt’s 2018 leverage will increase to about 5x following the Sucampo acquisition but will improve to below 5x in the first half of 2019 and 4.7x by the end of 2019. Based on Mallinckrodt’s strong track record of deleveraging after the previous acquisitions, we remain confident in the company’s commitment to reducing leverage before pursuing any others. As such, we expect Mallinckrodt to limit its 2018 business-development and share-repurchase activities and direct internally generated cash flow to reduce leverage. We also recognize Mallinckrodt’s strong track record of successfully integrating acquisitions and expect a smooth integration of Sucampo.

The S&P downgrade comes at a sensitive time for Mallinckrodt. The company is searching for a new narrative and needs to diversity its income away from top-selling Acthar. Meanwhile, the company’s credit metrics are expected to deteriorate after the Sucampo deal.


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