Hearthside Food Solutions’ weakening operating performance is raising pressure on the company to take more aggressive action to address upcoming debt maturities, said three sources familiar with the matter.

While the contract food manufacturer’s European asset sale last fall provided a much-needed liquidity boost, Hearthside still needs to raise external cash to refinance its debt, two of the sources said. This could take the form of a recapitalization transaction to restructure the balance sheet, said the first and the third source familiar.

Hearthside completed divestitures of two European assets in October, resulting in proceeds of approximately EUR 235m (USD 257m) including retained cash, two additional sources said. The company also completed a sale-leaseback of two manufacturing properties resulting in net proceeds of about USD 23.3m, these sources added. The two transactions provided a liquidity enhancement of about USD 280m, in addition to USD 270m of total liquidity the company had in 3Q23.

However, the proceeds from the recent divestitures have been placed in an unrestricted subsidiary beyond the reach of lenders, two of the sources noted.

A recapitalization transaction could be done in or out of court, one of the sources said. Another said it’s possible first lien lenders could take over the company from existing sponsors Charlesbank and Partners Group.

In September, Hearthside lenders signed a cooperation agreement ahead of negotiations with the company and advisors to first lien lenders subsequently signed non-disclosure agreements.

S&P Global Ratings in December downgraded the issuer’s rating a notch to CCC, citing heightened default risk due to Hearthside’s weak financial performance and cash flow, very high leverage, weakened liquidity position, and discounted debt trading levels. The ratings agency also noted that the company’s USD 202.5m revolving credit facility is due 23 November 2024, and its USD 1.98bn outstanding first-lien secured term loan due May 2025 will become current in May 2024, which elevates the company’s refinancing risk.

Hearthside’s cash flow has withered considerably over recent quarters. As of 30 September, liquidity totaled USD 270m split between USD 72.7m of cash and USD 197m revolver availability, the two additional sources said. The company started 2023 with USD 323m of liquidity through USD 125.4m of cash on hand and USD 197m of revolver availability, the sources noted. For reference, liquidity totalled USD 376m as of end-3Q22 based on USD 178m of cash and USD 197m revolver availability.

Adjusted EBITDA in the third quarter fell 24% YoY to USD 50m compared to USD 66m booked in the prior year period, the sources said. Meanwhile, net revenue in the third quarter dropped 11% YoY to USD 920.4m compared to USD 1.03bn generated in the prior year period, the sources said. The top and bottom-line weakness continues to be heavily impacted by persistent volume headwinds as consumer demand remains soft, the sources continued.

Consequently, total net leverage as of 30 September edged higher to 7.5x based on USD 2.82bn of total consolidated net debt and USD 379m of LTM adjusted EBITDA.

The Illinois-based contract manufacturer of snacks, baked foods and sandwiches has struggled to generate free cash flow since Charlesbank and Partners teamed up to acquire Hearthside in 2018, according to a Moody’s Investors Service credit report last year.

Hearthside’s USD 1.145bn L+368.75 bps first lien loan due 2025 was last quoted at 78.58/80 on Markit. Two incremental first lien loans are quoted at similar levels. The USD 350m 8.5% senior unsecured notes due 2026 last traded on 2 January at USD 8.25, according to MarketAxess.

Ares Capital provided a private placement USD 73m second lien loan to Hearthside in 2018 and also owns over USD 29m principal of the first lien loans, according to SEC filings by the BDC.

Evercore and Alvarez & Marsal are advising Hearthside, while first-lien lenders are working with PJT Partners and Gibson Dunn and unsecured holders are engaged with Perella Weinberg and Paul Hastings.

Neither Charlesbank nor Hearthside responded to requests for comment. Partners Group declined to comment.