Case Study: Chapter 11 Restructure of a Food Processing Company

Overview

Cedar Croft Consulting guided a $225 million revenue company through a financial restructuring to realign its burdensome debt structure to enable it to compete more effectively in the future.

The Company

The Company was a private equity-owned leading developer, manufacturer and marketer of pre-cooked meat, poultry and pork products sold to the food service industry and manufacturers of packaged food. Much of its business was concentrated with three major customers. The company employed approximately 750 employees. Processing plants and cold storage facilities were located in California, Kentucky and Pennsylvania.

Situation

The Company incurred substantial indebtedness in conjunction with the financing of an acquisition of another company by its private equity owners. Debt consisted of an asset based facility and a substantial amount of subordinated high-yield bonds. Profitability was eroding due to rising product and labor costs, and manufacturing inefficiencies in its Pennsylvania plant. A physical inventory count revealed deficiencies in the Company’s perpetual inventory tracking system, and resulted in a significant write-down in the value of inventory.

The inventory write-down required an adjustment to the Company’s borrowing base such that the company was in an over-advance position on borrowings from its senior lenders, and had no liquidity or plan to correct the situation.

The private equity owners fired the existing CEO, and promoted a company VP to assume the CEO role. Realizing it was “out of the money”, the owner advised the senior lender it would no longer be providing financial support to the Company.

After an introduction by the Company’s senior lender, Cedar Croft Consulting was engaged by the new CEO to assume the role of Interim Chief Financial Officer and provide operational advisory services.

Cedar Croft’s Approach

Cedar Croft’s team of financial and manufacturing experts immediately conducted a review of the Pennsylvania plant and confirmed and quantified the magnitude of the manufacturing deficiencies. After this initial assessment, and considering the liquidity issues facing the Company, Cedar Croft recommended a going-forward operating strategy that involved the closure of the Pennsylvania plant. Cedar Croft and Company management presented these findings to the senior lender. After considering this strategy, the senior lender agreed to continue to provide financial support to the Company, but only through the protection of a bankruptcy filing.

Engagement Key Steps

  1. A detailed business plan was prepared that considered the closure of the Pennsylvania plant, the potential loss of a major customer, and the costs associated with a Chapter 11 filing procedure.
  2. Appropriate debtor’s bankruptcy counsel was identified and engaged.
  3. An $18 million debtor in possession (DIP) financing facility was secured from the senior lender.
  4. A communication plan was developed to address the concerns of customers, vendors, employees, bondholders and the general media.
  5. Documents for all necessary pre- and post-bankruptcy filings were prepared, working closely with debtor’s bankruptcy counsel.
  6. Engaged in discussions and negotiations with key vendors to ensure the uninterrupted supply of raw materials throughout the restructuring process.
  7. Engaged in ongoing communications with the unsecured creditors’ committee, the bondholder’s committee and their professionals;
  8. Assisted the Company in the selection and engagement on an Investment Banker.
  9. Provided information and support to the Investment Banker in the preparation of an Offering Memorandum document, the solicitation of offers to purchase the Company, and in closing a sale transaction.
  10. Managed the closure and liquidation of the Pennsylvania plant;
  11. Identified operational improvements for the California and Kentucky plants, and assisted in implementation.
  12. Performed ongoing activities as Chief Financial Officer, including managing cash flow and negotiating revisions to the DIP agreement when required.

Results

  1. The voluntary Chapter 11 filing allowed the Company to continue operating its business profitably while restructuring its substantial debt obligations.
  2. The Company was able to salvage its key “at risk” customer by proving that its service needs could be met by transferring production to the other plants.
  3. The company successfully exited bankruptcy and continues to operate profitably and with a manageable debt level.
  4. There was 100% recovery to all secured lending parties, including bondholders, and 70% recovery to unsecured lenders;
  5. The pre-filing secured lender also provide the DIP loan and the exit financing.