$MNKD MannKind Relies on 'Death Spiral' Financing to Help Settle Looming Debt
VALENCIA, Calif. (TheStreet) -- MannKind (MNKD) is using a mix of discounted stock and more debt to settle a $100 million convertible loan coming due in two weeks.
The stock-for-debt exchange, which covers a bit more than half of MannKind's obligation, is the worst part of the agreement announced Wednesday because the exchange price of the stock is determined by the price of Mannkind shares over the next 10 trading days.
This is the classic definition of a death-spiral convert, a form of distressed financing which forces companies to hand over more shares when the stock price falls. MannKind was able to negotiate a floor price for its stock conversion, which does mitigate some of the potential damage.
MannKind isn't at risk of shutting down imminently because of the death-spiral convert, but the company was forced into a weakened negotiating position with its debt holders because Afrezza, an inhaled form of insulin for diabetes, is selling poorly and its long-term financial health is uncertain at best.
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Money is very easy to come by in the red-hot health care sector today, so MannKind's inability to settle its $100 million debt on more favorable terms is a sign that investors have low confidence in Afrezza and the company's management.
If Afrezza continues to be a commercial disappointment, MannKind will face a cash shortfall in the next year because of other significant spending obligations.
Sanofi (SNY - Get Report), which sells Afrezza under a license from MannKind, reports second-quarter earnings on Thursday.
MannKind shares are down 7.6% to $4.45 in Wednesday trading following the announcement of the new financing agreement.
Under the agreement, MannKind is issuing new convertible debt due in 2018 to settle $28 million of the existing $100 million convertible debt. Terms of the new debt are similar to the old debt.
