June 10, 2020
Sooooooo…this is a different one. Maines Paper & Food Service Inc. and 12 affiliates (the “debtors”) filed for chapter 11 bankruptcy in the District of Delaware. For a company with a 100-year history — starting with the sale of “nickel candy” to local grocers on through an expansion into fountain supplies, toys and paper products in the 40s and then further expansion into foodservice in the 70s — it seems safe to say the last two years have been as active as any. Indeed, this bankruptcy filing marks the culmination of a two-year roller-coaster process.
Let’s talk about the foodservice business. The debtors operate in over 30 states; they have 10 distribution centers and 3 retail stores across the Northeastern, Midwestern and Southern regions of the US. They have two primary business units. First, their foodservice supply chains solutions unit (the “QSR Business”) provides centralized purchasing and distribution services for QSR (“quick service restaurant”) chains like Burger King ($QSR), Tim Hortons ($QSR), Wendy’s Co. ($WEN), Applebees ($DIN), IHOP ($DIN) and Chilis. For these clients, the debtors manage (i) sourcing and purchasing of food product, (ii) delivery to their distribution centers and (iii) from there, shipping to individual franchisees. They’re not a food producer; they’re not a food seller. They are as middle man as you can get.
The second segment is the logistics services business unit (the “Darden Business”) which services restaurants owned by Darden Restaurants Inc. ($DRI). This business is similar to the QSR Business but for the fact that Darden procures its own foodservice products and the debtors merely handle the logistical side of making sure that the food then gets to DRI’s many restaurant brands.
The restaurant space — as we’ve documented time and time again — has been very challenging for years. Long-time PETITION readers will recall that we’ve highlighted on multiple occasions how rising wages, labor shortages and trucking challenges were nibbling away at already-relatively-low margins. As a servicer to restaurants, the debtors, too, suffered from these issues. Per the debtors:
Even prior to the COVID-19 pandemic, the Debtors faced several years of significant operating pressures resulting from industry-wide truck driver and warehouse labor shortages. During 2018, the foodservice distribution industry specifically, and the distribution & logistics industries more generally, experienced a significant labor shortage, primarily due to the robust labor market. For the Company, these labor shortages caused delivery-related challenges and amplified expenses due to a greater reliance on independent contractors and increases in overtime and shrink cost. The Debtors took steps to identify and implement a number of cost-rationalization initiatives together with scheduled customer resignations in order to manage their costs and address these challenges. However, the cumulative effect of these operational challenges was severe: the Debtors experienced a $29.9 million pre-tax loss in 2018 and a $25.9 million pre-tax loss in 2019.
The debtors’ owners, the Maines Brothers, started waving the white flag in the summer of ‘18. They hired advisors and attempted to divest the company.
They weren’t successful. While a sale didn’t happen, the debtors and their advisors were able to recapitalize the business and otherwise shore up liquidity. At that point the company complemented its existing asset-backed revolving credit facility with a term loan (issued by a non-debtor and secured by certain real estate) and a promissory note issued to an affiliate of Darden. Moreover, the debtors were able to obtain price increases and a small cash infusion from two of its then-largest QSR Business customers (presumably QSR and DIN). These improvements set the company up for a second bite at the sale apple.
And, indeed, by February ‘20, the company received letters of intent that, combined, would have led to the sale of the business in parts. One buyer wanted the QSR Business; another the company’s NY-based corporate headquarters and the Darden Business. About a month and a half away from closing COVID-19 entered the mix.
To say that COVID-19 crushed the debtors’ business would be an understatement. Customer volumes instantly fell by up to 87%. All of the debtors’ end customers were shut down. This is the part of the aforementioned roller-coaster where the seat belt breaks and yet the car is riding up a monstrous ascent. The company’s proposed buyers balked and the PNC Bank NA ($PNC), as agent under the ABL, exercised control over the company’s cash and withdrew its support of the going concern transaction. To make matters worse, several large customers terminated their distribution agreements.
But that’s not all. Lineage Bluebird Debtco LLC, an affiliate of Lineage Foodservice Solutions LLC, saw an opportunity and seized it. Like, literally. They took out PNC in April ‘20 and commenced a partial strict foreclosure of the company’s assets. Get out those Article 9 textbooks folks. What this means is that they took title to the company’s primary assets, i.e., inventory and receivables, its corporate HQ, and other real estate. They then entered into a foreclosure agreement pursuant to which they forgave $80mm of senior secured debt under the ABL, contributed $7.5mm in cash to fund a post-foreclosure wind down in court and another $2mm to pay holders of general unsecured claims pursuant to a plan of liquidation (PETITION Note: trade debt totals over $100mm, exclusive of special first day relief). Lineage also made job offers to the ~850 Maines employees. Lineage is pushing for plan confirmation within the next 90 days which, no doubt, will include releases.
After this untimely sequence of events, it appears the releases are the best the Maines Brothers can hope for at this juncture.
*****
One other point here. In some respects this is a decent result because at least the employees get to keep their jobs. But it’s important to acknowledge the cascading effects stemming from the foreclosure of this business and subsequent consolidation into a competitor.
The most illustrative way to see this is via the debtors’ executory contract rejection motion. While it’s largely possible that a number of these contracts would not have been assumed and assigned in conjunction with the Feb ‘20 sale transactions, it’s equally plausible that many of them would have been. COVID-19 struck and all of that went out the window. In turn, now all of the business that the debtors’ contract counterparties had looks to follow. Most likely, that business is simply redundant to Lineage.
By way of illustration, the debtors are now rejecting, among other things:
Multiple retail store leases, undoubtedly contributing to the struggles that landlords already face;
Multiple distribution center leases … ditto above (though, we’d think distribution center leases may have a better rebound scenario);
Several other real estate leases (i.e., cold storage centers, nurseries, farms);
Recycling and waste treatment contracts; and
Vehicle lease and, separately, vehicle maintenance contracts.
Multiply this throughout the economy and it’s easier to understand why the market finally corrected a bit this week after a huge euphoric run.
