Ad Hoc Group Slated to Get At Least Two-Thirds of Del Monte Foods’ Post-Reorg Equity Pursuant to RSA If Credit Bid Is Successful; Company Faces Execution Risk in Driving Meaningful EBITDA Improvement Amid Current Headwinds

Del Monte Foods’ RSA contemplates a sale of all assets with a credit bid from DIP term lenders serving as the stalking horse bid. The DIP term loan facility incorporates $412.5 million in initial principal comprising $165 million of new money and $247.5 million of rolled-up first-out term loans.

Participation in the new-money component of the DIP term loan facility will be open to all holders of the company’s first-out loans on a pro rata basis, with participants in the new-money facility able to roll up to $247.5 million in principal amount of their prepetition first-out loans into the DIP term loan facility.

The ad hoc group, represented by Gibson Dunn and led by Fidelity and Davidson Kempner, held $289 million, or about 73%, in principal amount of the $395.5 million of first-out term loans as of the petition date. This group is backstopping the DIP term loan facility in return for a 10% backstop premium to be paid in kind. All new-money providers, including those not in the backstop group, are entitled to receive a 4% PIK commitment premium.

A key question first-out term lenders not in the group face is whether they should provide any additional funding to the debtors. On the basis of the terms of the transaction, we believe that they should participate in the DIP if they believe the equity value of the reorganized company is worth more than $190 million, as illustrated below:
 

In the event the credit bid is successful, the RSA contemplates a post-emergence capital structure comprising an exit ABL facility rolled over from the DIP ABL facility and a potential $125 million exit term loan facility. As of the petition date, $211 million was drawn on the $550 million prepetition ABL facility, but availability was under $10 million because of borrowing base limitations. The debtors project that the ABL balance will increase by over $150 million over the next three months amid seasonal working capital needs, according to the DIP budget, which reflects the proposed $500 million DIP ABL facility.

According to the RSA, the credit bid amount for “all or substantially all” of the company’s assets would be at least $412.5 million based on the proposed DIP term loan principal, although the actual amount is likely to increase due to the contemplated premiums and accrued interest encompassed by the DIP.
 

The RSA contemplates that indications of interest from potential bidders are due on Aug. 20 and binding offers for the debtors’ assets are due on Sept. 14. In the event that the stalking horse bidder is successful, all DIP term loan claims will be used to credit-bid pursuant to section 363 of the bankruptcy code. If another bidder submits the winning bid, all DIP term loan claims shall be repaid in full in cash using proceeds from the sale.

Assuming that the credit bid is successful and that all eligible lenders participate in the DIP facility, we conclude that the ad hoc group would get about 67% of the post-reorg equity and the non-ad-hoc group would get about 23%, with management receiving the remaining 10%, assuming a fully awarded management incentive plan as of the effective date.

A summary of implied post-reorg equity splits, which reflects the 10% PIK backstop premium on new money and 4% PIK commitment premium on new money and assumes all credit-bid claims are diluted by the proposed MIP of up to 10% of reorganized equity, is shown below.
 

Del Monte’s Post-Pandemic Period Marked by Cash Burn Amid Declining Demand, Excess Inventory

After an initial post-pandemic boom, Del Monte Foods has seen declining demand in recent years, leading to deteriorating operating performance, as Octus has discussed. The company has increased promotional spend and faced higher warehousing and logistics costs, which, combined with the working capital outflows associated with its excess inventory and rising cash interest costs, has led to the company burning a substantial amount of cash in the last few years.

In August 2024, the company utilized a drop-down LME and raised $240 million from certain existing term lenders in the form of newly created first-out term loans. However, this transaction only provided a near-term liquidity boost to free up ABL facility capacity and fund the 2024 pack season. The company once again needs a capital injection to fund this year’s pack season, resulting in the bankruptcy filing and the need for $165 million of new-money DIP financing commitments.

The company has seen significant margin compression in recent years, as EBITDA fell from a peak of $200 million in 2022 to a negative amount in recent quarters. We think it unlikely the company can return to peak EBITDA as it continues to grapple with declining demand and excess inventory, leading to logistical challenges evidenced by recent plant closures and consolidation efforts. We think that the business is closer to the trough than peak and thus may face significant execution risk in driving a meaningful EBITDA improvement, especially since there doesn’t appear to be many favorable tailwinds at the moment.

Del Monte Foods is one of the country’s leading producers, distributors and marketers of fruit and vegetable packaged food products. Fresh fruit and vegetable producers such as Dole plc and Fresh Del Monte Produce trade at about 7x EBITDA, while stable consumer packaged goods companies have traded around 9x to 10x EBITDA in recent years. We think Del Monte Foods may warrant a lower EBITDA multiple than either of these groups given its distressed state, market share declines (despite strong positions) and shrinking manufacturing footprint.

Since the second half of 2022, Del Monte Foods’ ABL facility has remained about 80% utilized (or higher) as the company struggled to sell through excess inventory and generate operating cash flow. If the ABL balance continues to remain materially drawn, even outside of pack season, investors should be aware of the possibility that a future capital injection could be needed, which may reduce the company’s equity value.

This analysis, published by Krishan Sutharshana, is based on information available in the public domain, including offering memoranda and other materials. A separate Octus team, the Private Company Analysis, or PCA, team, also has access to information available to creditors. You can find the PCA analysis HERE. Note: The information and conclusions of the PCA analysis may differ due to the information each team has access to and the information barriers between the teams.