The second-lien term loan for bankrupt health food provider Nellson Nutraceutical slipped further last week as bankruptcy proceedings drag on due to lack of settlement with the controlling shareholder Fremont Partners. The debt had been trading in the 40-50 context and has fallen to around 30-35, according to a dealer who notes there will not be enough value for second-lien lenders to make a recovery. The company's first-lien debt was trading around par and dropped to the low 90's, the dealer said. Recoveries are expected to be between 90-100%. Bill Lenihan, managing director at Fremont, declined comment.
The nutritional supplement and bar manufacturer sought Chapter 11 bankruptcy protection in January last year. The debt has continued to trade down as Fremont, now known as Calera Capital, and second-lien lenders attempt to gain some recovery, according to dealers and traders. "Meanwhile, the company just fritters away," said one portfolio manager who researched the company but was not involved in the deal. Poor financial results and legal costs reaching near $25 million are also hurting liquidity, a dealer said. Calls to Laura Davis Jones, attorney at Pachulski Stang Ziehl Young Jones & Weintraub, for Nellson, were not returned.
Nellson took out $100 million in financing in February 2004 to repurchase shares from shareholders, including Fremont (LMW, 2/23/2004). At the time, Lenihan noted the company had significantly grown its EBITDA and cash flow allowing for the additional leverage. In the latter part of 2004 and throughout 2005, Nellson's business was negatively impacted by factors including weaknesses in the market for nutritional bars and powders and challenges in the company's production processes, according to bankruptcy filings.
On April 3 Nellson filed a motion for an order for authorization to enter an insurance premium financing agreement with Cananwill, a provider of insurance premium funding. The financing will provide Nellson the ability to pay about $1.2 million of premiums on existing insurance policies it says are required by law for day-to-day operations, or are in the best interest of its estates, according to court filings. The policy will grant Cananwill first priority security interest. It could not be determined whether this caused the debt to drop further.
As investors tried to squeeze recovery from the company, differences arose on the valuation of the company. Nellson and Fremont, first lien, second lien and subordinated lenders each submitted a different valuation. On Jan. 18, the judge ruled that the company's value was $320 million nearly $90 million less than the $404.5 million valuation provided by Nellson and Fremont. This valuation leaves Fremont out of any money in a recovery.
UBS led the $360 million financing the company entered into in 2004. It comprises a $285 million first-lien term loan and a $75 million second-lien term loan. UBS offered to settle with Fremont to give them 2% equity in the reorganized company to avoid the lengthy appeal of trial. First-lien lenders were against the settlement and the court ultimately ruled against it on March 14, alleging it was a reorganization plan in disguise, crafted without input from first-lien lenders. Calls to Brendan Dillon, head of global sales and trading at UBS, were not returned.
