Mallinckrodt's Potential Bankruptcy: Hedge Funds' New Path to Dodge Opioid Settlement Debt?

Last year, Mallinckrodt Plc MNK pledged to pay $1.7 billion to settle numerous lawsuits by governments and individuals impacted by the opioid crisis, who argued the company had a hand in sparking the public health disaster. 

The settlement, expected to be disbursed through 2030, was intended to finance overdose reversal drugs and cover the treatment expenses of opioid users.

Nevertheless, hedge funds that backed Mallinckrodt support a plan for the company to pull out of the agreement with roughly $1.3 billion still outstanding, Wall Street Journal reported.

Several hedge funds, including Silver Point Capital, are negotiating with Mallinckrodt's board to assume control of the business via a bankruptcy declaration. Other funds, such as Bracebridge Capital and Alta Fundamental Advisers, are discussing its potential Chapter 11 filing.

The funds argue that Mallinckrodt was overgenerous in its settlement commitment and that the company's funds should primarily belong to top-tier lenders, such as themselves, rather than to victims or state governments.

They believe Mallinckrodt's continued contributions to the opioid trust could harm the company's financial stability and breach its legal obligations to investors.

The report also noted that the hedge funds suggest that Mallinckrodt should restructure through bankruptcy due to declining business. 

In response, Mallinckrodt confirmed its ongoing discussions with "its financial stakeholders" to determine the best way forward considering their debt and opioid settlement commitments. 

It is a controversial move, as Mallinckrodt was the first opioid manufacturer to globally settle with state attorneys general, municipal governments, and countless individuals who accused the company of downplaying the addictive risks of its prescription opioids. 

Upon settling the lawsuits, Mallinckrodt and its executives were exempted from future liabilities for opioid sales, and the company was allowed to continue producing the drugs.

Price Action: MNK shares are up 61.40% at $0.71 on the last check Wednesday