Borden Dairy Company

January 5, 2020

Dallas-based Borden Dairy Company and 17 affiliated companies joined fellow dairy manufacturer, Dean Foods Company (which we’ve written about here, here, here and, lastly, here upon its chapter 11 filing) in bankruptcy court this week. Why? “Like other milk producers and distributors, Borden is facing a multi-year trend of shrinking margins and increasing competition. These negative trends have been exacerbated by declining margin over milk at retail even as the price of raw Class 1 milk has been increasing.” Boo Moo.

What a storied history. Founded by Gail Borden in 1856 (PETITION Note: read the link if you want to feel awful about yourself and what you’ve accomplished in your life), the New York Condensed Milk Company started the first successful condensed milk processing plant in 1861. In the latter part of the 19th century, the company added processed and evaporated milk to its offerings and pioneered the use of glass milk bottles.

In 1919, the company changed its name to Borden Company in honor of Mr. Borden. This was a period of great uncertainty — one captured in Hemingway’s “The Sun Also Rises” — but that didn’t stop Mr. Borden’s descendants from expanding their dairy-fueled reign. They acquired two of the largest ice cream manufacturers in the US, while also adding cheese and acquiring a chemicals company. Over those years, Borden acquired over 200 companies. “Elsie the Cow” was born in 1936 and became a well known mascot.

By the 80s, Borden was the world’s largest dairy operator with sales exceeding $7.2b. Then gravity prevailed. By the early 90s, the company experienced financial distress borne out of two much expansion over the years and sold to KKR for $2b. KKR then dismantled Borden by selling off divisions and brands to various buyers.

The debtors underwent a comprehensive restructuring in 2017. At the time of the restructuring, the debtors took on a $275mm credit facility held, in tranches, by PNC Bank and KKR. The effective interest rate on the term loan facilities was 9.3% as of 12/31/19, which is on top of the 4.95% interest due under the revolving portion of the loan. So, yeah, debt and the debtors’ interest expense nut is a big part of this bankruptcy filing.

The company is no longer the behemoth it once was. Nevertheless, it employees over 3000 people and makes tens of thousands of service calls to its customers (e.g., Walmart Inc. & Sam’s Club ($WMT)), Kroger Inc. ($KR), 7-Eleven, CVS HealthCorp. ($CVS), Starbucks Inc. ($SBUX), etc.).

But its number suck. In 2018, the company had a total net income loss of $14.6mm on ~$1.2b of sales. In 2019, the loss widened to $42.4mm. Liquidity, therefore, is a big issue — and it’s compounded by (a) interest expense and amort payments on the term loan and (b) employee obligations under mandatory retirement plans and settlements related to pension funds. More on this below.

The macro reasons for the debtors’ problems sound like a Dean Foods’ encore:

• The milk industry is highly competitive ✅;

• Non-dairy products and beverages are stealing share (DISRUPTION!!) ✅;

• Discount grocers have “intensified competition and reduced the margin over milk at retail” ✅; and

• Walmart and other retailers who use milk as a loss leader are napalming margins ✅;

• Commodity and freight costs are up ✅.

The company doesn’t tip its hand as to what it hopes to achieve in bankruptcy other than a “breathing spell” to get its sh*t in order. The Wall Street Journal noted:

Borden Chief Executive Tony Sarsam told The Wall Street Journal that he believes Acon, which took a major stake in the company in 2017, will be the primary owner of the business after the bankruptcy. He declined to say how much debt Borden would erase as part of its bankruptcy restructuring.

Acon is currently one of the debtors’ majority owners.

*****

There’s one thing that the Wall Street Journal doesn’t pick up on though. The debtors’ pensioners are about to get the royal screw.

The debtors note that, pre-filing, they made periodic payments pursuant to two settlement agreements they entered into in connection with their withdrawal from its (a) Central States, Southeast and Southwest Areas Pension Fund terminated in ‘14 (“Central States”) and (b) Retail, Wholesale and Department Store International Union pension fund terminated in ‘16 (“RWDSU”). In connection with the ‘17 restructuring, the debtors established a special purpose account funded with $30mm to fund these settlement payments — $185,225/month to Central States and $6,000/month to RWDSU. The account now has $26.6mm in it.

The debtors are laying claim to this money; they note that it is unencumbered by their lenders nor the pensioners.

This hasn’t been a great time for pensioners. With coal bankruptcies galore, Jack Cooper, and now the dairy producers, anxiety levels must be through the roof.

• Jurisdiction: D. of Delaware (Judge Sontchi)

• Capital Structure: $275mm of funded debt (see above). $30mm Term Loan A (PNC), $175mm Term Loan B (KKR Credit Advisors US LLC), $70mm RCF (PNC)

• Professionals:

  • Legal: Arnold & Porter Kaye Scholer (D. Tyler Nurnberg, Seth Kleinman, Sarah Gryll, Jeffrey Fuisz) & Young Conaway Stargatt & Taylor LLP (M. Blake Cleary, Kenneth Enos, Elizabeth Justison, Betsy Feldman)

  • Independent Directors: Harold Strunk, Andrea Fischer Newman

  • Claims Agent: Donlin Recano (*click on the link above for free docket access)

• Other Parties in Interest:

  • ACON Dairy Investors LLC

  • New Laguna LLC

  • Agent, RCF Facility Lenders & Term Loan A Facility Lenders: PNC Bank NA

    • Legal: Blank Rome LLP (Regina Stango Kelbon, Josef Mintz, John Lucian, Gregory Vizza)

  • Term Loan B Facility Lenders: KKR Credit Advisors US LLC/Franklin Square Holdings LP

    • Legal: King & Spalding LLP (Roger Schwartz, Peter Montoni, Christopher Boies, Stephen Blank) & Morris Nichols Arsht & Tunnell LLP (Robert Dehney, Curtis Miller, Matthew Harvey, Matthew Talmo)

  • Official Committee of Unsecured Creditors

    • Legal: Sidley Austin LLP (Matthew Clemente, Genevieve Weiner, Michael Fishel, Michael Burke) & Morris James LLP (Carl Kunz III, Eric Monzo, Brya Keilson)