December 15, 2020 – The Court hearing the BDC Inc. (f/k/a Borden Dairy Company) cases confirmed the Debtors’ Second Amended Combined Plan of Liquidation [Docket No. 1331].

On January 5, 2020, Borden Dairy Company and 17 affiliated Debtors (“Borden” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 20-10010. At filing, the Debtors, a leading American milk processor and distributor founded in 1856, noted estimated assets between $100.0mn and $500.0mn; and estimated liabilities between $100.0mn and $500.0mn. In a subsequently filed Schedule A/B, the lead Debtor noted $746.1mn of assets and $927.8mn of liabilities [Docket No. 328].

Plan Overview

On June 26th, the Court hearing the Borden Dairy Company cases approved a $340.0mn sale of substantially all of the Debtors’ assets to New Dairy Opco, LLC (the “Successful Bidder” or “Buyer”) which now operates under the Debtors' former name. New Dairy Opco, LLC is an acquisition vehicle created by Capitol Peak Partners, headed by former Dean Foods CEO Gregg Engles, and prepetition term loan B (“TLB”) lender KKR & Co (“KKR”). The purchase price is comprised of (i) amounts owed in respect of the $175.0mn TLB; (ii) $94.1mn that will be paid to prepetition revolving loan (“RCF”) lenders and term loan A (“TLA”) lenders; and (iii) $72.1mn of further assumed liabilities.  

The initial Plan and Disclosure Statement [Docket No. 1030] picks up the wind-down story from there: “Following the Sale, the Debtors are focused principally on efficiently winding down their Estates, preserving Cash held in the Estates and monetizing the Retained Assets. The Retained Assets include, among other things, Cash, accounts receivable, certain deposits, prepayments, credits and refunds, insurance policies or rights to proceeds thereof and certain Retained Causes of Action. This combined Disclosure Statement and Plan provides for the Retained Assets, to the extent not already liquidated, to be liquidated over time and the proceeds thereof to be distributed to Holders of Allowed Claims in accordance with the terms of the Plan and the treatment of Allowed Claims described more fully herein. The Wind-Down Administrator will effect such liquidation and Distributions. The Debtors will be dissolved as soon as practicable after the Effective Date.”

The following is an amended summary of classes, claims, voting rights and expected recoveries showing highlighted changes (defined terms are in the Plan and/or Disclosure Statement, see also the Liquidation Analysis below):

• Class 1 (“Other Secured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate amount of claims is $0 and estimated recovery is 100%.
• Class 2 (“Other Priority Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate amount of claims is $226k – $404k and estimated recovery is 100%.
• Class 3 (“TLB Deficiency Claim”) is impaired and entitled to vote on the Plan. The estimated aggregate amount of claims is $65.0mn and the estimated recovery is 1.5% –  3.0%. Each Holder of an Allowed TLB Deficiency Claim shall receive in exchange for such TLB Deficiency Claim, such Holder’s Pro Rata share of the Distribution Proceeds as follows: (A) following the Initial Distribution and prior to any subsequent Distributions to Holders of General Unsecured Claims, the portion of the Initial Distribution that the TLB Lenders would have otherwise been entitled to on account of the TLB Deficiency Claim if they were Holders of General Unsecured Claims shall be distributed to the TLB Lenders from the remaining Distribution Proceeds after the Initial Distribution; and (B) any further Distributions on account of TLB Deficiency Claims and General Unsecured Claims shall be distributed Pro Rata to all Holders of TLB Deficiency Claims and General Unsecured Claims. The projected recovery assumes that the Equity Settlement Agreement is approved.
• Class 4 (“General Unsecured Claims”) is impaired and entitled to vote on the Plan. The estimated aggregate amount of claims is $64.6mn – $97.1mn and the estimated recovery is 1.9% – 3.8%. Each Holder of a General Unsecured Claim shall receive in exchange for such General Unsecured Claim such Holder’s Pro Rata share of the Distribution Proceeds as follows: (A) the first $1,000,000 in Distribution Proceeds shall be distributed Pro Rata to all Holders of General Unsecured Claims (such Distribution, the “Initial Distribution”); (B) prior to any subsequent Distributions to Holders of General Unsecured Claims, the portion of the Initial Distribution that the TLB Lenders would have otherwise been entitled to on account of the TLB Deficiency Claim, absent the foregoing clause (A), shall be distributed to the TLB Lenders from the remaining Distribution Proceeds after the Initial Distribution; and (C) any further Distributions on account of TLB Deficiency Claims and General Unsecured Claims shall be distributed Pro Rata to all Holders of TLB Deficiency Claims and General Unsecured Claims. The projected recovery assumes that the Equity Settlement Agreement is approved.
• Class 5 (“Intercompany Claims”) is impaired, deemed to reject and not entitled to vote on the Plan. The aggregate amount of claim is N/A and estimated recovery is 0%.
• Class 6 (“Intercompany Interests”) is impaired, deemed to reject and not entitled to vote on the Plan. The aggregate amount of claim is N/A and estimated recovery is 0%.
• Class 7 (“Interests in Holdings”) is impaired, deemed to reject and not entitled to vote on the Plan. The aggregate amount of claims is N/A and estimated recovery is 0%.

Voting Results

On December 10, 2020, the Debtors' claims agent notified the Court of the Plan voting results [Docket No. 1314], which were as follows:

• Class 3 (“TLB Deficiency Claim”): 2 claim holders, representing $65,000,000 in amount and 100% in number, accepted the Plan.
• Class 4 (“General Unsecured Claims”): 235 claim holders, representing $44,508,039.00 (or 96.26%) in amount and 89.69% in number, accepted the Plan. 27 claim holders, representing $1,730,639.62 (or 3.74%) in amount and 10.31% in number, rejected the Plan.

Asset Sale

On June 26, 2020, further to a May 22nd bidding procedures order [Docket No. 671] and an auction finishing on June 13th, the Court hearing the Borden Dairy Company cases approved a $340.0mn sale of substantially all of the Debtors' assets to New Dairy Opco, LLC (the “Successful Bidder” or “Buyer”). The APA in respect to the sale is attached to the sale order as Exhibit 1.

New Dairy Opco, LLC is an acquisition vehicle created by Capitol Peak Partners, headed by former Dean Foods CEO Gregg Engles, and prepetition term loan B ("TLB") lender KKR & Co (“KKR”). The purchase price is comprised of (i) amounts owed in respect of the $175.0mn TLB; (ii) $94.1mn that will be paid to prepetition revolving loan ("RCF") lenders and term loan A ("TLA") lenders; and (iii) $72.1mn of further assumed liabilities.  

In a press release announcing approval of the sale Borden announced “the start of a new chapter with Capitol Peak Partners and its affiliates acquiring substantially all Borden assets following completion of a court-supervised sale process. Capitol Peak will assume majority ownership of the new company, and KKR, an existing lender to Borden, will be a minority investor….Today, the court granted approval of the approximately $340 million sale. Upon closing of the transaction, Borden's former controlling and majority equity holders, ACON Investments and Grupo Lala, respectively, will no longer have ownership interest in the business. Capitol Peak and KKR will establish a new board of directors."

Key Documents:

The Disclosure Statement [Docket No. 1206] attached the following documents:

• Exhibit A: Liquidation Analysis
• Exhibit B: Disclosure Statement Order

The Debtors filed Plan supplements at Docket Nos. 1285, 1319 and 1325 which attached the following documents:

Docket No. 1285

• Exhibit A: Description of Retained Causes of Action

Docket No. 1319

• Exhibit A: Identity of Wind-Down Administrator
• Exhibit B: Wind-Down Administration Agreement

Docket No. 1325

• Exhibit A: Description of Retained Causes of Action

Equity Settlement

The Combined Document provides: "The Initial Plan proposed releases and exculpation in favor of Borden’s current and former directors and officers. The Committee [D.I. 1124] and KKR [D.I. 1095] objected, arguing, among other things, that such releases and exculpation were not supported by adequate consideration. At the Committee’s suggestion, the Debtors, the Committee, KKR, and ACON agreed to mediate certain of the objections before Judge Shannon, who has served as a plan mediator during these Chapter 11 Cases. With substantial assistance from the mediator Judge Shannon, the Debtors, the Committee, and ACON agreed to a settlement in principle, supported by Judge Shannon, pursuant to which ACON agreed to contribute $1,000,000 to the Debtors’ Estates (the 'Settlement Consideration') and waive its administrative claim in the amount of $401,282.17 in exchange for a general release in favor of ACON and releases and exculpation in favor of the current and former directors appointed by ACON (including two independent directors) and the Debtors’ current and former officers (collectively, the 'Equity Settlement').

The Equity Settlement is subject, among other things, to definitive documentation acceptable to the Debtors, the Committee and ACON (the 'Equity Settlement Agreement') and final approval by the Bankruptcy Court. Once finalized, the Debtors intend to file a motion seeking the Bankruptcy Court’s approval of the Equity Settlement pursuant to Bankruptcy Rule 9019 (the '9019 Motion'). The Debtors believe that the proposed Equity Settlement, if approved and consummated, will (i) materially increase the consideration available under the Plan for Distribution to Creditors holding Allowed Claims in Class 3 (TLB Deficiency Claim) and Class 4 (General Unsecured Claims) and (ii) avoid potential costly and time-consuming litigation that will diminish, and potentially exhaust, the assets available for Distribution to such Creditors." 

Prepetition Indebtedness

As of the Petition date, the Debtors’ capital structure consisted of outstanding funded-debt obligations in the aggregate principal amount of approximately $255.8mn,consisting of the RCF Facility, the TLA Facility, and the TLB Facility.

Events Leading to the Chapter 11 Filing

In a declaration in support of the Chapter 11 filing (the “Monaco Declaration”), Jason Monaco, the Debtors' CFO and Treasurer, detailed the events leading to Borden’s Chapter 11 filing.

The Monaco Declaration does an excellent job of covering the numerous operational and competitive pressures faced by the dairy industry [borrowing liberally from the Dean Foods declaration, see Dean Foods' Docket No. 46 for further sector background], noting the confluence of (i) rising prices for raw milk (up 27% since January 2019), (ii) declining margins for retail milk products as competition intensifies from discount grocery retailers and vertically integrated competitors in a position to dominate shelf space with private label products (and use loss leader pricing strategies), (iii) changes in consumer preferences which have included a shift towards alternative "milk" products, (iv) increases in transportation and fuel costs and (v) growing pension fund obligations. All of the above ultimately cutting net income to a point where the Debtors can no longer service interest payments in respect of their existing credit facilities. 

The Monaco Declaration's most brutal reality, however, is this: people are simply drinking less milk. Consumption is down 6% since 2015 and over the last 45 years milk consumption has staggeringly "declined by over 100 gallons per person in North America."

The Monaco Declaration states: "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.

Notwithstanding the Debtors’ best efforts, an overwhelming debt burden and a host of industry trends have combined to drive the Debtors to seek chapter 11 relief. In 2018, the Debtors reported consolidated net sales of $1.181 billion with gross profit of $292 million. Notwithstanding the foregoing, the Debtors experienced an income loss from operations in the amount of $2.6 million and a total net income loss of $14.6 million. These losses continued into 2019, with the Debtors reporting income loss from operations in the amount of $22.3 million and a total net income loss of $42.4 million from January 2019 through December 7, 2019.

Despite Borden’s best efforts over the past several years, its current obligations under the Credit Agreement have severely limited its ability to produce positive net income. The Debtors have paid approximately $21 million per year in cash interest over the past several years, a burden that can no longer be serviced by the Company’s underlying earnings and cash flow. The Credit Agreement also requires Borden to make quarterly payments totaling $2.35 million each year on the Term Loan A Facility, further depleting the Company’s operating cash. 

The Debtors’ struggling financial performance over the past two years is directly correlated to the milk processing industry’s highly competitive nature, rapidly-changing industry landscape, and dynamic retail environment. In recent years, dairy products have begun to compete with other replacement non-dairy nutritional products and beverages for consumer sales, which has contributed to demand decreases. In addition, the growth of discount grocery retailers has intensified competition and reduced the margin over milk at retail, making it increasingly difficult for Borden to hold its margin while competitively pricing its products to appeal to consumer price sensitivities. Borden competes against others that do not depend on the profitability of milk exclusively, including vertically-integrated retailers and dairy cooperatives that now process their own milk.

While milk remains a household item in the United States, people are simply drinking less of it. Aggregate U.S. consumption of conventional dairy milk has declined approximately 6 percent since 2015. In parallel, since the turn of the century, the number of U.S. dairy farms has rapidly declined. From 1992 to 2018, over 94,000 family dairies closed their doors at the rate of 10 dairy farms per day. In the past year and a half alone, over 2,730 dairy farms have gone out of business.

Concurrent to the decline of the number of milk producers, dairy processers have seen bottling margins decline due to competitive pressures from milk suppliers and large (and sometimes vertically integrated) customers. Couple this with the fact that for the past forty-five years consumption has steadily declined by over 100 gallons per person in North America, and it is no surprise that Borden and other dairy suppliers (such as Dean Foods) have begun to feel the same negative effects that have plagued dairy farmers for the past decade.

The decline in dairy sales has occurred in conjunction with the rise of oat, nut, soy, and other alternative ‘milk’ products at retailers and food service locations across the country. Options like almond, soy, rice, coconut, and hemp beverages are beginning to demand more and more space on grocery store shelves as consumers have grown to embrace new flavors and alternative diets. Sales of nut and plant beverages grew by 9% in 2018 and had sales of $1.6 billion, according to the Plant Based Foods Association.

[T]he price of conventional raw milk has risen 27 percent since January 2019. This increase in the cost of milk to supply the Debtors’ operations is at odds with the downward trend of prices for the end user (as discussed in further detail below). The Debtors expect further raw milk inflation in 2020.

Consolidation in the retail sector has given a few retailers and supermarket chains considerable buying power. This trend combined Competitors on both ends of value chain vertically integrating leads to further margin compression. Over the past two years, some of the Debtors’ large format retail customers have become more vertically integrated?meaning they have bought or built processing assets to compete with the Debtors.In addition, some of Borden’s suppliers have invested in processing assets to combat the contracting market pressures felt by dairy farmers. 

This has resulted in two negative consequences. First, retailers that are vertically integrated typically re-dedicate key shelf-space that was formerly occupied by branded products for their own private label products. Accordingly, customer awareness at major food service retail establishments has decreased, which in turn has muted the marketing and sale initiatives implemented by the Debtors in the past two years. Second, by expanding up and down the value chains, these retailers and suppliers enjoy the benefits of broader profit pools while relying on smaller profit margins. Retailers have aggressively priced their private label milk to drive foot traffic in their brick and mortar outlets. This trend has negatively affected the Debtors as it has required them to price their products more competitively, compressing already thin profit margins. These low margins are unsustainable for companies such as the Debtors who solely operate in the processing space. Since 2018, the Debtors have experienced a 31% decline in gross margin (inclusive of distribution costs). 

The Debtors purchase diesel fuel to operate their extensive transportation fleet. In 2019, the Debtors spent approximately $22 million annually on fuel. Resin, a fossil fuel-based product, is another significant raw material input for Borden and is used to produce plastic bottles. Sustained, national driver shortages over the past few years have also added to freight costs by increasing the wage, overtime and temporary employee costs.

Liquidation Analysis (see Exhibit A of Disclosure Statement [Docket No. 1206] for notes)

About the Debtors

Operations: Founded in 1857 by Gail Borden, Jr., Borden is a heritage American brand that produces more than 35 wholesome and delicious products enjoyed by millions of people every day. Borden was the first company to develop a patent for the process of condensing milk, as well as the first company to use glass milk bottles. In 1936, Elsie became America's favorite spokes-cow, and was recognized in 2000 by AdAge as one of the top 10 advertising icons of the 20th century. Today, Borden is headquartered in Dallas and operates 12 milk processing plants and nearly 100 branches across the U.S. that produce and distribute nearly 500 million gallons of milk annually for customers in the grocery, mass market, club, food service, hospitality, school and convenience store channels. The company's People First culture has inspired decades of loyal tenure among hundreds of the 3,300 people Borden employs. In 2019, Borden landed the No. 16 spot on Forbes' list of America's Most Reputable Companies, highlighting the company's well-earned trust amongst consumers.

Recent Corporate History: By the 1980s, Borden Inc. was the world’s largest dairy operator, with sales exceeding $7.2 billion. It was also the nation’s most active participant in the M&A market in 1987 after making 23 acquisitions totaling $442.6 million. Before the end of the decade, Borden acquired an additional 39 operations. By the early 1990s, however, Borden Inc. began experiencing financial distress, resulting in a number of its business units being divested. In 1995, Borden Inc. was sold to Kohlberg Kravis Roberts & Co. (“KKR”) for $2 billion, and became a private company. Over the next decade, Borden Inc. underwent a series of reorganizations, which ultimately resulted in KKR selling off many of the divisions and brands of Borden Inc. to various buyers.

Corporate Structure Chart

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