Interesting Debts

[lakon]

December 31, 2016

Deerfield Facility Financing Obligation (2019 Notes)
Principal amount $75 million

Deerfield Senior Convertible Notes (2018 Notes)
Principal amount $28 million

Note payable to principal stockholder (The Mann Group [TMG])
$50 million (with an additional $30 million available to borrow)

Let's assume that MNKD pays Deerfield the remaining $10 million debt payment in some fashion in July for a total of $20 million in 2017.
Let's assume that MNKD taps TMG for the remaining available to borrow.

Deerfield combined debt would be approximately $83 million.
TMG debt would be approximately $80 million.

Things that make me go hmmm...

Since TMG subordinated their debt to Deerfield with a debt covenant requiring MNKD to maintain $25 million in cash at the end of each quarter OR in available borrowings from TMG, could it be that Deerfield and TMG are going to make a deal? Perhaps Deerfield accepts payment from the TMG facility with certain stipulations about equity conversion if and only if Deerfield and/or TMG provide additional financing over a period of time. Perhaps Matt uses $5 million from TMG so that he only has to come up with another $5 million to settle the matter with Deerfield for this year. Then, he plays chicken with the quarterly cash requirement. Maybe Deerfield plays nice on that issue. Maybe TMG comes up with a little more credit. Who knows? How this plays out in the next few months will be interesting.

[matt]

Deerfield is an investment fund with a fiduciary obligation to their investors, same as any other financial intermediary and for that reason they can't "play nice" unless they have no other option. The entire purpose for the subordination and the $25 million covenant is that Deerfield gets first dibs on any asset, and they are guaranteed that the company will have at least some cash they can grab as well. From Deerfield's perspective the deal was all about having somebody else backstopping the deal, and it didn't matter if that "somebody" was The Mann Group, a bank, or some other deep pocket so long as Deerfield could assert their preferential claims.

This is a deal that has gone sideways for Deerfield, just as it has for many investors. They hoped to get their debt back and make a little extra money on the convertible feature and other sweeteners. That doesn't look like it is happening so their job now is to at least break-even on the debt piece. When a lender insists on others subordinating in order for them to stay in the deal, it means they are starting to worry about default and as a lender it is their job to worry about worst case scenarios.

You are correct that how this plays out in the coming months will be interesting. I suspect another share for debt swap is in the works, maybe for the whole $10 million and maybe $5 in cash and $5 in shares or something like that. Regardless, Deerfield is going to get paid on time one way or another as the company will not want the debt to go into default since that starts to trigger cross-default provisions and rapidly deteriorates into a forced bankruptcy declaration. Crunch time will come late in the summer and Matt has about two months to figure it all out. Lets hope he is getting better advice than Aegis.

[mnkdfann]

May 30, 2017 7:36:47 GMT -5 matt said:

Crunch time will come late in the summer and Matt has about two months to figure it all out. Lets hope he is getting better advice than Aegis.

Matt threw in the towel.

ca.finance.yahoo.com/news/mannkind-provides-senior-management-130000567.html

VALENCIA, Calif., May 30, 2017 (GLOBE NEWSWIRE) -- MannKind Corporation (MNKD) (MNKD) announced today that its Board of Directors appointed Michael Castagna, Pharm.D., as Chief Executive Officer effective May 25, 2017. Dr. Castagna replaced Matthew Pfeffer, who served as both CEO and Chief Financial Officer since January 2016 and as CFO from 2008 to 2016.