December 18, 2019 − High Ridge Brands Co. and 8 affiliated debtors ("High Ridge Brands" or the "Debtors") filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 19-12689. The Debtors, one of the largest independent branded personal care companies (holding rights, inter alia to Zest and dr Fresh products), are represented by Edmon L. Morton of Young Conaway Stargatt & Taylor LLP. Further board-authorized engagements include (i) Debevoise & Plimpton LLP as corporate, finance and litigation counsel, (ii) Ankura Consulting Group, LLC (“Ankura”) as restructuring adviser, with Ankura's M. Benjamin Jones to serve as Chief Restructuring Officer, (iii) PJT Partners LP (“PJT”) as investment banker and (iv) Prime Clerk, LLC as claims agent.
The Debtors’ lead petition notes between 200 and 1,000 creditors; estimated assets between $100.0mn and $500.0mn; and estimated liabilities between $500.0mn and $1.0bn. Documents filed with the Court list the Debtors’ five largest unsecured creditors as (i) Mercer QIF Fund PLC ($27.4mn bondholder claim), (ii) Barings Global Special Situations 3 SARL ($27.0mn bondholder claim), (iii) Millstreet Credit Fund LP ($22.9mn bondholder claim, (iv), Principal Funds, Inc. – Global Diversified ($15.6mn bondholder claim) and (v) JPMorgan Investment Funds – Global High Yield Bond Fund ($10.9mn bondholder claim). All 50 of the Debtors' top 50 unsecured claims exceed $1.0mn and 48 relate to bondholder claims.
The Debtors are controlled (98.4%) by CD&R HRB Holdings, L.P., an affiliate of private equity firm Clayton, Dubilier & Rice ("CD&R"). CD&R purchased the Debtors in 2016 in a transaction that they valued at $415.0mn. CD&R Operating Partner John Compton serves as the Debtors' Chairman.
In a press release announcing the filing, High Ridge Brands advised that: “it is pursuing the sale of the Company and is currently engaged in active discussions with interested bidders. To facilitate an orderly sales process, the Company and its subsidiaries have commenced voluntary Chapter 11 proceedings in the U.S. Bankruptcy Court for the District of Delaware (the 'Court'). High Ridge Brands intends to complete the sales process under Section 363 of the U.S. Bankruptcy Code. The Company's U.K. business operations are not included in the Chapter 11 filing and will not be subject to the requirements of the U.S. Bankruptcy Code."
The Debtors have stated that "In conjunction with the sales process, High Ridge Brands has received a commitment for approximately $20 million in debtor-in-possession ('DIP') financing from its existing secured lender group.…High Ridge Brands has sufficient liquidity to meet its go-forward business obligations. The Company expects to service its customers with on-time, in-full deliveries of all product lines and pay its suppliers in full for goods and services provided on or after December 18, 2019, the Chapter 11 filing date."
- First Lien Credit Agreement – The Debtors are parties to a June 2016 first lien credit agreement (the “Prepetition First Lien Credit Agreement”) with BMO Harris Bank, N.A. as administrative agent. The Prepetition First Lien Credit Agreement consists of a $220.0mn term loan and a $50.0mn revolving credit facility. As of the Petition date, the Debtors owed an aggregate principal amount of not less than $263.4mn, consisting of $213.4mn in term loans and $50.0mn of revolving loans.
- 2017 Senior Unsecured Notes – On March 22, 2017, Debtor High Ridge Brands Co. issued $250.0mn of senior unsecured notes (the “2017 Senior Unsecured Notes”) that bear interest at 8.875% and have a maturity date of March 15, 2025. As of the Petition date, High Ridge Brands owed an aggregate amount of not less than $261.0mn on the 2017 Senior Unsecured Notes (inclusive of both principal and interest).
- Trade Debt – As of the Petition date, the Debtors’ books and records list approximately $28.7mn in outstanding trade liabilities.
The Jones Declaration (defined below) details what appears to be extensive but unfruitful marketing efforts to date, with investment banker PJT initiating efforts in early September that resulted in contact with approximately 125 potential investors, 44 executed confidentiality agreements, ten indications of interest, nine parties given access to an electronic data room (and a partidge in a pear tree) by October 2019. During this period, the Debtors also “continued to explore a consensual restructuring with the Prepetition First Lien Lenders and the Ad Hoc Group [comprised of certain bondholders]. Although the Prepetition First Lien Lenders and the Ad Hoc Group each proposed potential structures a consensual restructuring could take, ultimately the parties were not able to reach an agreement prior to the commencement of the Chapter 11 Cases.”
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Jones Declaration”) [Docket No. 2], M. Benjamin Jones, the Debtors' Chief Restructuring Officer, detailed the events leading to Debtors' Chapter 11 filing. In brief, the Debtors have been caught out by a liquidity crisis as they attempted to pivot from their historical "low-cost, volume-based" strategy, which was proving unsustainable as to their hair and skin products given "momentous shifts" in consumer demographics (those shifts apparently not hitting teeth products) to a more "accretive" strategy based on an "innovative," "diversified" portfolio of products. That shift, however, required a higher marketing spend during a period of lower revenues; a liquidity gap exacerbated by a significant lag time between that marketing spend/efforts and getting their products onto retail shelves. All of this apparently a surprise to the Debtors who ultimately blame their slip into bankruptcy on a bar of soap; a longtime supplier of bar soap hiking prices and otherwise failing to deliver required stock and leaving the Debtors sliding into bankruptcy without the arm of lenders, whose forbearance agreements expired on December 18th (ie the Petition date), to steady them.
The Jones Declaration states: "The personal care industry is highly competitive and, like many other retail industries, undergoing momentous shifts as a result of changing demographics and consumer tastes. The Debtors’ oral business remains stable, but the portfolio of legacy brands of hair and skin…are concentrated in market segments and price points that have been declining.
In addition, they are concentrated in opening price points, i.e., the least costly line of a particular item, and a large portion of the Debtors’ distribution of their legacy hair and skin products comes from Dollar Stores, both of which make it difficult to pass along inflationary input costs to consumers. Because the Debtors’ strategy had originally been a low-cost, volume-based structure with similarly low, and now shrinking, margins, this market shift forced the Debtors to pivot.
In 2018, the Debtors accordingly chose to diversify their portfolio through innovation launches in growing segments within the hair and skin categories at significantly accretive gross margins…the work the Debtors did to pivot to this strategy in 2018… would not bear fruit until 2019 when these products replace others on retailers’ shelves.
The Debtors’ new strategy shifted the company’s mission to ‘creating extraordinary experiences for savvy consumers’ fueled by transformative, on-trend innovation that creates value for both consumers and customers.
These new innovations require meaningful brand support (marketing expense) to build awareness and trial at product launch. This increase in marketing expense began when the new innovation products started to hit retailer shelves in early 2019.
While the Debtors were working to pivot their strategy to drive profitable growth through innovation in 2018, the risks of the previous strategy, which included exclusive contracts with key manufacturers to lock in low costs, became a negative reality. In particular, the Debtors’ exclusive bar soap manufacturer, which had not been able to produce sufficient capacity to fulfill orders for some months, increased the Debtors’ price by 60% at the end of its contract term. Since the relationship was exclusive, the Debtors did not have a readily available alternate supply and were forced to pay the higher costs while they sourced and qualified new suppliers, which took 9 months…The Debtors’ ability to deliver bar soap orders to its customers on time and in full fell from 96% in April 2018, to 69% by December 2018, to 54% by March 2019. Further, this liquidity constraint came at a time when the Debtors needed that liquidity to support their innovation products with marketing investments.
The result of this has ultimately been that the Debtors’ efforts to pivot to a more diversified portfolio with an innovation focus has continued to be hindered by the Debtors’ liquidity profile.
From the fourth quarter of 2018 to the first quarter of 2019, the Debtors’ liquidity declined by approximately $20 million. This decline resulted from more than $16 million of cash interest and amortization on account of the Debtors’ secured and unsecured debt and working capital outflow of close to $6 million, which resulted primarily from the Debtors carrying higher inventory balances."
The Jones Declaration then details a series of waivers and forbearance periods beginning in the Spring of 2019 negotiated with senior lenders and bondholders who otherwise had the ability to declare the Debtors in default of their bank and bond debt. Negotiations with these stakeholders also included plans to have these groups lead an out-of-court restructuring effort, but ultimately these discussions failed to win the necessary support of those key stakeholders. Although the Jones Declaration does not state as much, the patience of senior lenders and bondholders seems to have worn thin, with forbearance agreements agreed in respect of bank and bond debt expiring on December 18th, the date of their filing.
Corporate Structure ChartAbout the Debtors
High Ridge Brands, headquartered in Stamford, Connecticut, is one of the largest independent branded personal care companies in the United States by unit volume, with a mission to craft extraordinary experiences for savvy consumers. Today, High Ridge Brands has a portfolio of over thirteen trusted brands, serving primarily North American skin cleansing, hair care and oral care markets, including Zest®, Alberto VO5®, REACH®, Firefly®, Dr. Fresh®, Coast®, White Rain®, LA Looks®, Zero Frizz®, Rave®, Salon Grafix®, Binaca® and Thicker Fuller Hair®. In addition, the Company has relationships with leading entertainment properties through which it has a portfolio of licenses such as Star Wars, Batman, Spiderman, Hello Kitty, and Transformers. The Company operates an asset-light model, outsourcing its manufacturing needs, and has approximately 140 employees.
High Ridge Brands is a portfolio company of Clayton, Dubilier & Rice, a private investment firm with an investment strategy "predicated on producing financial returns through building stronger, more profitable businesses."
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