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Southern Foods Group, LLC – Leading Dairy Producer Files Chapter 11 to Address Debt and Unfunded Pension Obligations, Secures $850mn in DIP Financing, Eyes Sale to Creditor Dairy Farmers of America


November 12, 2019 − Southern Foods Group, LLC (d/b/a/ Dean Foods Company) and 42 affiliated Debtors (NYSE: DF, “Dean Foods” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of Texas, lead case number 19-19-36313. The Debtors, the largest processor and direct-to-store distributor of fresh and other dairy products in the United States, are represented by William R. Greendyke of Norton Rose Fulbright US LLP. Further board-authorized engagements include (i) Davis Polk & Wardwell LLP as general bankruptcy counsel, (ii) Alvarez & Marsal as financial advisor, (iii) Evercore Group LLC as investment banker and (iv) Epiq Bankruptcy Solutions as claims agent.

The Debtors’ lead petition notes between 50,000 and 100,000 creditors; estimated assets between $1.0bn and $10.0bn; and estimated liabilities between $1.0bn and $10.0bn. Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) Central States Southeast & Southwest Areas Pension Plan ($722.4mn pension plan obligation), (ii) The Bank of New York Mellon Trust Company, N.A.  ($700.0mn in respect of senior unsecured notes due 2023) and (iii) Dairy Farmers of America ($172.9 trade debt). All 30 of the Debtors' largest 30 unsecured claims are in excess of $1.0mn.

In a press release announcing the filing (see also the 8-K which includes cleansing materials), the Debtors advised that: "The Company intends to use this process to protect and support its ongoing business operations and address debt and unfunded pension obligations while it works toward an orderly and efficient sale of the Company. 

Dean Foods also announced that it is engaged in advanced discussions with Dairy Farmers of America, Inc. ('DFA') regarding a potential sale of substantially all assets of the Company. If the parties ultimately reach agreement on the terms of a sale, such transaction would be subject to regulatory approval and would be subject to higher or otherwise better offers in the bankruptcy."

Debtor-In-Possession (“DIP”) Financing

The Debtors have announced that they have, subject to Court approval, secured $425.0mn of DIP financing comprised of (i) a new money revolving loan facility in an aggregate principal amount of approximately $234.8mn, which will be in the form of revolving loans or, subject to a sub-limit of $25.0mn, the form of letters of credit and (ii) upon entry of a final DIP order, term loans that will roll-up debt existing under the Debtors' pre-petition Senior Secured Revolving Credit Facility.

The Debtors have also reached agreement with pre-petition lenders in respect of its Receivables Securitization Facility and will seek Court authority to allow that facility to continue in effect during the Chapter 11 Cases. Once modified following a $25.0mn reduction in facility size, the Debtors will continue to have access to $425.0mn under this securitization facility.

Prepetition Debt

As at filing, the Debtors had approximately $189.0mn in secured indebtedness under their prepetition revolving credit facility ("RCF"). Additionally, certain of the Debtors are party to a $450.0mn prepetition receivables facility (the "AR Facility"), pursuant to which the Debtors sell trade receivables to two non-Debtor wholly owned, bankruptcy remote special purpose vehicle subsidiaries, which are a significant source of liquidity for the Debtors. The Debtors also have approximately $700.0mn of senior unsecured notes outstanding. 

  1. Excludes $195.2 of outstanding LCs
  2. Subject to pricing grid based on total net leverage ratio
  3. Maturity of 9/15/2022 if unsecured bonds are not repaid/refinanced by 6/16/22

Events Leading to the Chapter 11 Filing

The Debtors' cleansing materials note the following operational challenges:

Secular Headwinds Facing Industry

  • Volume and margin over milk decreasing
    • Fluid milk category decline accelerated in 2019 to (4%)
    • Retailers tactically using low priced private label to drive traffic
    • Hyper-competitive environment leading maufacturers to private label price concessions
  • Costs
    • Higher Commodity costs (dairy and non-dairy) pressuring margins
    • Unemployment at all-time lows driving competitive and expensive labor market
    • Nationwide driver shortage

Short-term Challenges/Disruptions Facing Dean Foods

  • Key large customer volume losses resulted in short-term deleverage and a cost structure reset
  • Consolidation of plants drove unplanned transitory costs and customer service issues
  • Margin improvement initiatives and deteriorating earnings resulted in large and small customer losses

About the Debtors

Dean Foods is a leading food and beverage company and the largest processor and direct-to-store distributor of fresh fluid milk and other dairy and dairy case products in the United States. Headquartered in Dallas, Texas, the Dean Foods portfolio includes DairyPure®, the country's first and largest fresh, national white milk brand, and TruMoo®, the leading national flavored milk brand, along with well-known regional dairy brands such as Alta Dena®, Berkeley Farms®, Country Fresh®, Dean's®, Friendly's®, Garelick Farms®, LAND O LAKES®* milk and cultured products, Lehigh Valley Dairy Farms®, Mayfield®, McArthur®, Meadow Gold®, Oak Farms®, PET®**, T.G. Lee®, Tuscan® and more. Dean Foods also has a joint venture with Organic Valley®, distributing fresh organic products to local retailers. In all, Dean Foods has more than 50 national, regional and local dairy brands as well as private labels. Dean Foods also makes and distributes ice cream, cultured products, juices, teas, and bottled water. Approximately 15,000 employees across the country work every day to make Dean Foods the most admired and trusted provider of wholesome, great-tasting dairy products at every occasion. For more information about Dean Foods and its brands, visit www.deanfoods.com.

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