Moody's Investors Service affirmed the ratings of Mallinckrodt (NYSE: MNK) ("Mallinckrodt") including the Ba3 Corporate Family Rating and the Ba3-PD Probability of Default Rating. The rating action follows the announcement that Mallinckrodt will acquire Therakos, Inc. for $1.325 billion in cash. The outlook is stable.

Moody's will evaluate the impact, if any, on the instrument ratings when the final financing terms are announced.

Moody's affirmed the following ratings of Mallinckrodt International Finance S.A.:

Corporate Family Rating, at Ba3

Probability of Default Rating, at Ba3-PD

Senior Secured Bank Credit Facility, at Ba1(LGD2)

Senior Unsecured Notes (with subsidiary guarantees) at B1 (LGD4)

Senior Unsecured Notes (without subsidiary guarantees) B2 (LGD6)

Speculative Grade Liquidity Rating, at SGL-3

The rating outlook is stable.

RATINGS RATIONALE

Moody's affirmation of the Ba3 Corporate Family Rating reflects the overall modest impact that the acquisition of Therakos will have on Mallinckrodt's credit profile. With less than $200 million of revenue, the Therakos assets will represent around 5% of Mallinckrodt's total revenue, and the acquisition does not significantly change Mallinckrodt's scale, diversity or business risk profile. Moody's forecasts that adjusted debt to EBITDA for the fiscal year ending September 2015 will rise to 4.4x from 3.5x. These metrics are pro forma for the acquisitions of Therakos and Ikaria (acquired in April 2015). Moody's projects debt to EBITDA will decline to the 4.0x range or below within the next 12-18 months due to growth in EBITDA. Further, the receipt of approximately $270 million of divestiture proceeds from the sale of the CMDS (Contrast Media and Delivery Systems) business, as well as cash generation will also provide opportunities for deleveraging.

While the overall impact of the Therakos acquisition is modest, the deal is credit negative as it comes just several months following the close of the $2.3 billion acquisition of Ikaria. The rapid pace of acquisitions increases integration and execution risk and also reduces transparency into fundamental operating performance. Further, Mallinckrodt's recent financial results showed a marked slowing in growth of its main franchises, raising questions about the company's ability to sustainably grow acquired assets. With little in the way of internal research and development, Mallinckrodt must expand use of its existing products in order to drive organic growth.

Mallinckrodt's Ba3 Corporate Family Rating is supported by the company's significant scale and Moody's expectation of growth and limited competitive threats in the company's key business areas, which generally have high barriers to entry. The rating is also supported by Moody's expectation for strong cash flow, creating the potential for rapid deleveraging. However, Moody's anticipates that cash flow will be deployed more towards the acquisition of EBITDA-generating assets rather than debt repayment.

The Ba3 reflects the potential for operating volatility caused by Mallinckrodt's high-risk nuclear products business and its concentration of profits in Acthar and opioids, both of which also carry exogenous risks. In addition, the ratings are constrained by Mallinckrodt's aggressive appetite for acquisitions that will likely lead to increased leverage from time to time, and risks inherent in a rapidly evolving business strategy. Given a limited internal research and development pipeline, Moody's expects Mallinckrodt to pursue additional acquisitions to drive growth. Further, Mallinckrodt tends to be attracted to assets that it views as being "undervalued", generally as a result of high perceived market risk.

The affirmation of the SGL-3 Speculative-Grade Liquidity Rating reflects that the Therakos acquisition could place pressure on Mallinckrodt's liquidity position if the company utilizes substantial cash, revolver borrowings or other short-term debt as part of the financing.

Moody's could upgrade the ratings if the company sustains good organic growth and strong predictable free cash flow while maintaining debt/EBITDA below 3.0x. An upgrade to Ba2 would also require a significant improvement in liquidity.

Conversely, if Moody's expects Mallinckrodt to sustain debt/EBITDA above 4.0 times the ratings could be downgraded. This scenario could arise if Mallinckrodt faces an unexpected decline in one of its key products or if the company pursues additional large, debt-funded acquisitions. Further, any weakening of liquidity could lead to a downgrade.

The principal methodology used in these ratings was Global Pharmaceutical Industry published in December 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.