Hearthside - an LBO to Restructuring Case Study

Lessons from the bankruptcy and fall of Hearthside Food Solutions

Author

HY Harry
June 10, 2025

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It’s case study time - let’s talk about Hearthside Food Solutions.

At some point this Company came up in a conversation I was having, I think around 2023, but maybe in early 2024. I was either talking about this or a comparable to it to someone deep in the consumer goods space. They brought up how Hearthside was a no brainer pass and it came down simply to customer concentration. All it takes is one customer to back out or reduce volume and then suddenly you have significant issues. It’s risk that was bound to happen, so he argued that he doesn’t do any large customer concentration deals - even if it’s blue chip customers, insurance companies, the government, etc. While there’s some deals with concentration risk that you have to play, in retrospect, this Pass was a good idea as Hearthside eventually filed for bankruptcy in late 2024.

A 2018-vintage LBO, by late 2024, Hearthside filed for Chapter 11 bankruptcy protection in the Southern District of Texas in November of 2024. The RSA outlined a plan to eliminate approximately $1.9B of debt (~2/3 of its debt load) and inject $200mm of new equity capital into the business; additionally supported by a $300mm DIP.

In this piece, we’ll get into what happened to this once, high-flying company.

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The Rise of Hearthside

The First Sponsor Group: Hearthside is a contract baking and co-manufacturing snack provider. We’ll get into more later, but the business grew to include nutrition bars, snack bars, cookies, crackers, and other grain-based food and snacks. Hearthside was originally a carve-out of a few Roskam Baking facilities that was sold to Wind Point Partners in 2009. Rich Scalise, a former Ralcorp and ConAgra executive was brought in as CEO of the Michigan-based maker of snack bar, pretzels, and other snacks. In 2009, it was a mere $145mm revenue business that would rapidly grow through tuck-ins and organic growth. Constitution Capital Partners were also part of the first equity group. In 2010, Hearthside acquired a cereal and granola facility in Oregon and a cookies, crackers, and baked bars maker based in Ohio.

Along the way, Wind Point completed a $400mm Dividend Recap, led by Antares, in 2012. Senior Leverage post the transaction was 3.8x, with 4.7x Total Leverage.

From there, Wind Point merged Hearthside and its other comparable portfolio company, Ryt-Way Industries, together, creating a 19-facility provider that spanned 19 states. By the end of 2013, the Company had grown to a network of 20 facilities and $1B in Sales. Along the way, Hearthside’s Golden Temple unit (a ready-to-eat cereal and granola company) was sold off to Post Holdings, but ultimately this business now had enough scale to be sold to a middle-market private equity firm.

The Second Sponsor Group: In 2014, Goldman Sachs and Vestar Capital Partners acquired Hearthside for a $1.1B valuation. This was a perfect window - rates were low and Hearthside was a compelling roll-up strategy that was rapidly growing. Later that year, Hearthside entered Europe by acquiring VSI, a Netherlands-based nutrition bar producer.

The tuck-ins didn’t stop there - in 2014, they acquired a former PowerBar facility from Post Holdings. Then in 2017, they acquired Standard Functional Foods Group, a bar and snack manufacturer. By 2018, the company entered new categories, made 4 acquisitions, and had grown to a network of 25 facilities - with Rich Scalise still at the helm.

The Third Sponsor Group: In 2018, a new group of Sponsors came in. Goldman and Vestar sold Hearthside and its 25 facilities for $2.4B to Charlesbank and Partners Group; a bit lower than the price tag of $2.5B it was looking for.

The firm was capitalized with $1.65B of debt, with a $150mm RCF, $1.12B 1L TL, and $375mm bridge loan meant to be taken out with a HY bond issue. This drove total leverage of 7x on $213mm of Adj. EBITDA (an >11x multiple). The Sponsors wrote a $905mm equity check, which was ~38% of TEV. Goldman and Barclays led the underwriting group.

While the new sponsor group planned to pursue new add-ons in new geographies, the 2nd sponsor group had a pretty positive outcome.

The tuck-ins continued, with an expansion into a new vertical following the acquisition of Greencore USA, a producer of frozen and refrigerated foods, in 2018. An additional tuck-in took place in 2021, when they acquired Interbake Foods from Weston Foods, a manufacturer of baked goods like cookies, crackers, wafers, and ice cream cones.

The Private Equity Sponsor game of hot potato seemed to be going well - but let’s talk a bit about the Business and what went wrong below.

The Business and its Downfall:

Based in Downers Grove, Illinois, Hearthside is the largest contract food manufacturer in the U.S. As a co-manufacturer, they are manufacturing products and foods for some of the largest snack brands out there. In 2024, Hearthside was producing ~1.7B lbs of food annually, leveraged plants across 11 states and a facility in Canada.

Revenue Mix (Via Bondoro):

  • Refrigerated and Frozen (40% of FY23 revenue): Refrigerated and frozen products such as ready-to-eat sandwiches, prepared meals, refrigerated entrees, salad kits, and other fresh/frozen meal components​, primarily the Greencore USA deal

  • Baking (32% of FY23 revenue): Oven-baked goods including cookies, crackers, biscuits, baked snacks, ice cream cones, and related bakery products

  • Bars & Components (16% of FY23 revenue): Nutrition bars, granola and cereal bars, protein bars, and various snack components (pretzels, popcorn, cereal pieces, etc.)​

  • Packaging (12% of FY23 revenue): Co-packaging and assembling services for products like cereals, dry snacks, candies, and even pet treats - basically the final step of putting together finished goods. Some food companies outsource part of their packaging

I get hungry just reading about it.

The industry had decent tailwinds during covid, driven by stay-at-home dynamics, but as demand towards food-away-from-home and towards lower priced products or private label brands, it hurt Hearthside’s volumes across the board.

Customers and Vendors:

Key customers included Mondelez, Kraft Heinz, PepsiCo, Kellogg’s, General Mills, National Sugar, and Cargill. So some of the notable products they’ll make are Chewy granola bars and Lucky Charms cereal bags. Customers leverage them when they need additional capacity. That in itself is somewhat of a yellow flag, where all of these companies have in-house facilities, as well as relationships with several other folks. Hearthside’s Supply-Chain VP was once quoted saying the following, “If we don’t stay competitive, our customers could potentially take the business in-house or even decide to invest in their own facility. We have to keep our quality scores up, consumer complaints down and costs low.” There are geographical benefits to Hearthside’s scale though, as they’re stretched across the country, providing convenience and lower shipping costs.

Not only was customer concentration a problem here, but customers had a lot of flexibility as it relates to increasing or decreasing volume.

Cost Structure:

We’ve all seen how dramatically wages have changed since covid - wages have had to rise dramatically, despite talent not necessarily being there. Labor shortages were also a massive struggle for Hearthside, as it takes longer to train bakery employees, so a shortage there led to inefficient utilization. During this inflationary period, Hearthside saw wages increase, with the inability to fully pass on prices to customers due to contractual obligations. Eventually, the high costs and dependence on large volumes from a concentrated customer mix started the downfall of the business.

2021 Adj. EBITDA was a solid $258mm, but FCF is all that matters - and that materially weakened in 2022 to -$154mm. And the worst news was yet to come:

The downfall began in 2023: A pullback in volume created a utilization drop and excess capacity that dragged on earnings. With a significant amount of fixed costs, and an inability to mitigate them, cash flow quickly deteriorated.

In early 2023, the Company divested its European division in order to zone in on the North American business. The Company would later try to use these proceeds as a “stick and carrot” for lenders - but we’ll explain this more later.

Shocking Labor Problems: The big shocker was in February 2023, when a New York Times investigation reported that migrant children were allegedly found working in unsafe conditions at some Hearthside contract factories. While this was through third-party staffing agencies, this bombshell report immediately led to government investigations, public backlash, and concerns from major customers. Migrant children were supposedly making Chewy granola bars and packing Lucky Charms and Cheetos. Hearthside denied knowledge of this, immediately cut ties with these employment firms, and then instituted strong hiring practices.

This came at a poor time, despite record revenue of $3.5B in 2023, profitability was eroding due to labor inflation. Then, due to contractual limitations, the Company couldn’t pass on labor price increases on to customers.

In May 2023, Moody’s downgraded the CFR of Hearthside from B3 to Caa1 due to poor performance and the expectation of high leverage and negative FCF. Moody’s estimated leverage of ~11x at YE22. S&P downgraded to CCC in December, 2023 due to the very high leverage, weakened liquidity, and refinancing risk. 3Q23 Revenue was -11% y/y to $920mm and Adj. EBITDA had fallen -24% y/y to $50mm due to persistent volume deadlines. The capital structure was close to being unsustainable from their view.

By the fall of 2023, the story had become quite distressed. The 1L TL was quoted at 86.6-87.9, with unsecured notes trading with a 40-handle by mid-2023.

The 2024 Bankruptcy filing: 

I decided to make this part of the piece very formal and report like - a lot of you guys have clamored for case study styled pieces - so here we go:

In early 2024, the Company started talking to lenders and third-party financing sources, kicking off restructuring conversations with lenders in the summer of 2024. Leverage was above 10x, making the capital structure unsustainable.

It was all over - Moody’s downgraded from Caa1 to Caa3 back in April of 2024, and S&P downgraded from CCC to CCC-/Negative in June, 2024. A restructuring was looming and liquidity was crunched.

Hearthside had previously engaged Alvarez & Marsal to engage with strategic analysis, and Ropes & Gray and Evercore as counsel and as advisor.

Prepetition Capital Structure:

Hearthside had ~$3.1bn in funded debt, including leases, across several tranches:

  • First Lien Revolver: ~$202.5mm senior secured revolver due Nov 2024, nearly fully drawn pre-bankruptcy. It shared first-priority collateral with the first lien term loan.

  • First Lien Term Loans: ~$1.9bn covenant-lite term loans due May 2025, which formed the bulk of the 2018 buyout financing and were the fulcrum security.

  • Second Lien Term Loan: $300mm 2L TL due 2026, which were junior liens. Ares and other direct lenders held sizable portions. Deeply subordinated in recovery.

  • Senior Unsecured Notes: $350mm notes (8.50%, due 2026), fully unsecured. These notes traded at ~8 cents on the dollar by 2024.

  • Capital Leases: ~$300–350mm of equipment/real estate lease liabilities. Included prepetition sale-leasebacks (e.g. $23mm in proceeds).

Key Dynamics Driving the Restructuring:

  • The maturity wall (Nov 2024 revolver, May 2025 term loan) created a hard refinancing deadline. Liquidity was insufficient and a regular way refinancing was impossible.

  • The First–Second Lien Intercreditor Agreement heavily restricted second-lien rights—blocking them from contesting DIP terms or valuations, limiting their leverage. This backdrop pushed the second-lien creditors to negotiate within the confines of what the first-lien group was willing to offer.

  • The first lien docs were covenant-lite, enabling optionality for the Sponsors. In 2023, Hearthside sold its European nutrition bar unit for ~€235mm and moved ~$188mm of proceeds to entities outside the debt structure (via ROS B.V. and a non-obligor U.S. entity). This trapped cash became a key negotiation chip for the Sponsors.

  • In Nov 2023, a Special Committee of independent directors was formed to review potential sponsor-related claims (e.g. dropdowns, fees). This raised litigation pressure, which likely influenced final settlement terms. The RSA ultimately granted broad releases to the sponsor, indicating these issues were resolved in exchange for concessions.

Creditor Class Analysis and Voting Summary

Hearthside’s Chapter 11 plan separated creditors into distinct classes, each with negotiated recoveries. Thanks to a pre-filing RSA, all impaired voting classes supported the plan, avoiding courtroom battles.

  • Class 1 – First-Lien Lenders: This included the revolver and $1.9bn term loan. Backed by 81% of first-lien claims, this group overwhelmingly supported the plan. In exchange for extinguishing ~$2.1bn of debt, they received nearly all the equity in the reorganized company—making them the “fulcrum” class. A new $150mm DIP was provided with $1.9B of debt converted into $200mm of new equity capital, with certain lenders backstopping the transaction. The group was tightly coordinated, forming an ad hoc group by Sept 2023 and negotiating as a bloc.

  • Class 2 – Second-Lien Lenders: Though projected to receive only ~6% recoveries, second-lien creditors voted unanimously in favor. The intercreditor agreement limited their legal leverage, so even a modest equity or warrant distribution negotiated via the RSA was better than fighting for zero. Some (e.g., Ares) held positions across both lien tranches and had incentives to support the broader deal.

  • Class 3 – Unsecured Noteholders: This group (holding $350mm of 8.5% senior notes) also voted to accept, with 77–78% already party to the RSA. Recovery was estimated at up to ~6%, likely via equity/warrants. Notes were trading at 8 cents pre-filing, and many noteholders preferred a small recovery with upside via rights to participate in the $200mm equity raise rather than risk getting nothing. An Official UCC was appointed but ultimately settled within RSA terms.

  • Class 4 – Trade Creditors: Trade claims were mostly paid in full through court-approved "ordinary course" payments to protect operations, making this class unimpaired.

  • Class 5 – Equity Holders: Existing shareholders (primarily the PE sponsor) were wiped out, handing control entirely to first-lien lenders.

Interplay between the creditor groups: This was a largely consensual restructuring. The first-liens drove the process, pre-wired through the RSA and DIP financing. They coordinated with junior creditors to offer just enough value to win their support, while the old equity did not participate. As one observer noted in October, lenders were expected to “take over the company”—which is exactly what happened. With all impaired classes voting yes, the court confirmed the plan without cramdown by March 2025.

DIP Financing and Exit Capital Structure

DIP Financing: Upon filing, Hearthside sought and obtained approval for a $300mm DIP financing facility to fund its Chapter 11 case. The DIP was provided by a group of the existing first-lien lenders (those who signed the RSA) – this is common, as prepetition secured lenders often extend DIP loans to protect their collateral and control the process. The structure of the DIP was a combination of new money and “roll-up” of existing debt. Specifically, $150mm was new liquidity injected (fresh cash to the estate), and $150mm was a roll-up of prepetition first-lien loans. The roll-up meant that a portion of the prepetition debt was elevated to postpetition DIP status, giving those lenders priming liens and superpriority claims for that debt. It’s a carrot and stick situation - lenders who participated in the new money DIP got to roll an equal amount of their old loan into the DIP. 

The DIP terms included typical protections for the lenders: a priming lien on all collateral, an interest rate and fees commensurate with a distressed loan, and milestones to keep the case on track. With respect to interest rates, the new-money tranche bears interest at adjusted term SOFR + 850 paid in cash, and roll-up tranche at adjusted term SOFR +850 PIK with additional stipulations.

Public sources indicate the DIP carried commitment and exit fees (approximately 2.5% and 1.5% on the new money portion) and a market-rate interest margin. The DIP funds were used to cover ongoing expenses (payroll, raw material purchases, etc.) and to ensure key constituents (employees, vendors, taxing authorities) remained unaffected during Chapter 11. 

Exit Financing and Capital Structure: Hearthside’s confirmed Plan of Reorganization put in place a drastically deleveraged capital structure at emergence. The key components of the exit financing package were:

  • Equity Rights Offering – $200mm in New Equity: The company raised $200mm of new equity capital from its creditors. This was executed via an equity rights offering backstopped by certain large lenders. This $200mm served multiple purposes: it provided working capital for the post-bankruptcy business, partially paid down the DIP loan, and funded plan distributions (transaction costs, etc.).

  • New First Lien Debt – $190mm ABL Revolver: Upon exit, Hearthside obtained a new asset-based lending (ABL) revolving credit facility of approximately $190mm. This exit ABL facility is a revolving line of credit secured by current assets (receivables, inventory, etc.), intended to provide ongoing liquidity for the business. Importantly, this ABL is likely undrawn at emergence, contributing to the $600mm of total liquidity the company reported having upon exit. The ABL replaces the old revolver (which was terminated) with a fresh source of working capital financing for the reorganized company.

  • Minimal/No Term Debt: The $2.0B+ first-lien term loans were fully converted into equity under the plan. This means the reorganized Hearthside emerged virtually debt-free, aside from the ABL and continuing lease obligations. Over $2 billion of funded debt was eliminated outright. This is a massive deleveraging – it slashed annual interest expenses by hundreds of millions and freed up cash flow.

Ownership and Governance: The former first-lien lenders became the new equity owners of the company. The majority equity ownership (control) went to a group of these lenders led by Apollo Global Management and Oaktree Capital. The second-lien and unsecured creditors, to the extent they received any equity, hold only small minority stakes (if any). A new board of directors was appointed, including a new Chairman (Brian Driscoll) alongside the existing CEO (Darlene Nicosia).

In summary, the exit capital structure for Maker’s Pride (the reorganized Hearthside) was significantly healthier: roughly $600mm of liquidity ($200mm new cash equity + undrawn ABL + rollover cash) and very low leverage (virtually no funded term debt).

Valuation and Recovery Analysis

Recovery outcomes: The confirmed plan was a classic debt-for-equity swap. First-lien secured lenders received nearly 100% of the new common equity (subject to dilution) in exchange for waiving ~$2.1B of first-lien claims. While their exact recovery depends on the equity’s future value, it was projected to be near-par. Any shortfall was mitigated by a $200mm equity contribution from first-lien lenders, ensuring the reorganized business was adequately funded. Effectively, they exchanged debt for ownership of a deleveraged company - they hope will recover the face value of their original claims over time.

By contrast, junior creditors received minimal recoveries. Second-lien and unsecured claims were lumped together and slated to recover up to ~6% of face value, likely through a small equity pool or warrants. For example, second-liens might receive ~5% of the new equity (subject to dilution), and unsecured notes a similarly minor stake. Unimpaired trade creditors were paid in full in the ordinary course, while old equity holders were wiped out (0% recovery).

These recoveries were consistent with market expectations. Unsecured notes traded at ~8 cents pre-filing, implying minimal value. At filing, Hearthside’s total debt stood at ~$3.1bn against an enterprise value estimated at ~$1.3–1.5bn, based on projected 2024 EBITDA of ~$184mm and a 7–8x market multiple. That left first-liens as the fulcrum class, with second-liens and unsecureds clearly out of the money.

The RSA and plan negotiations effectively settled valuation disputes. Junior creditors accepted the first-lien valuation and took a modest recovery rather than litigating over value they were unlikely to win. Their support also gave them potential upside participation through equity warrants or rights offerings.

From the first-lien lenders’ perspective, the $200mm equity infusion implied a reorg valuation they viewed as fair. One could infer that the reorganized company’s pro forma valuation (debt-free) might be around $1.5–1.7 billion, such that issuing $200mm of new equity for cash was acceptable (diluting the first-liens somewhat but ensuring the company’s viability).

An interesting aspect of the plan is the new equity ownership concentration. Apollo, Oaktree, and other sophisticated investors took majority control, signaling confidence in the business’s future. If Hearthside (as Maker’s Pride) can boost EBITDA to ~$300mm in coming years, the equity value, and thus recoveries, could increase meaningfully, possibly making first-liens whole or better. This structure is common in sponsor-backed restructurings.

One notable feature is that the plan granted full releases to the PE sponsors. This likely resolved contentious issues such as the €235mm in proceeds trapped in the unrestricted ROS B.V. subsidiary. With $187.9mm repatriated pre-filing, some or all of that cash was likely used to fund operations or support the plan, contributing modestly to improved creditor outcomes.

In conclusion, recoveries in the Hearthside restructuring were starkly bifurcated: the first-lien lenders took control and stood to recover a high percentage (depending on equity value realization) while the junior creditors accepted minimal recoveries.

Commentary on Sponsor Behavior and Strategic Decisions

The role and decisions of the private equity sponsor (the equity owners) in this saga provide important lessons. Hearthside’s sponsors (Charlesbank and Partners Group) faced a classic LBO dilemma: a heavily levered company facing operational decline with no equity cushion. Several sponsor decisions (and omissions) shaped the outcome:

  • Initial Leverage and Performance: Following the 2018 buyout, the company operated under a heavy debt load. While initially manageable, EBITDA fell from $258mm in 2021 to ~$184mm by 2024, driven by labor cost inflation, supply chain issues, and post-COVID volume declines. Sponsors pursued cost-cutting and plant consolidations, but critically, did not inject new equity to support the capital structure.

  • Advisor Engagement vs. Action: Sponsors hired restructuring advisors (Ropes & Gray, Evercore) in late 2022—well ahead of the revolver maturity—showing early recognition of the refinancing challenge. However, no out-of-court fix materialized. Solving the problem likely required hundreds of millions in fresh equity or subordinated capital, which the sponsors did not provide.

  • Asset Sales and the Unrestricted Subsidiary Maneuver: A key sponsor tactic was routing €235mm in proceeds from a European asset sale into an unrestricted offshore sub, later transferred to a non-guarantor U.S. entity. This ring-fencing move, while likely permissible under the credit docs, effectively kept the cash out of lenders' reach. Sponsors preserved bargaining leverage, offering to contribute the cash only in exchange for something (e.g., equity, releases). This move created friction with creditors and likely triggered the formation of a Special Committee. Ultimately, the RSA brought the funds back into play to help fund the restructuring.

  • Governance and Cooperation: In late 2023, sponsors agreed to appoint independent directors and form a Special Committee—standard creditor demands in sponsor-backed bankruptcies. This shift ceded control over major decisions (e.g., DIP financing, legal investigations), enabling the process to move forward.

  • Acceptance of the Creditor Takeover (RSA Execution): Most defining was the sponsors signing the RSA, consenting to a plan that wiped out their equity. They did not participate in the new equity raise and exited the business entirely.

  • Post-Emergence Outcome: Upon exit, creditors took full control, and the company rebranded as “Maker’s Pride,” signaling a new chapter. For the sponsors, it was a full write-off of their 2018 equity investment—offset only by having avoided further cash outlays or litigation risk. Strategically, their delay in addressing the capital structure and decision to trap cash secured a seat at the table but didn’t change the outcome. An earlier deleveraging—such as applying the €235mm to pay down debt while negotiating extensions—might have preserved value, but would still have faced structural headwinds. In hindsight, the Chapter 11 prepack was likely inevitable, driven by an aggressive capital structure misaligned with the business’s cash flow.

  • Equity Infusion vs. Kicking the Can: The sponsors did not inject new equity when the business began underperforming, a choice that ultimately led to losing the entire investment. Lesson: Sponsors of highly leveraged companies should consider early equity injections or buying debt at a discount if performance falters, but they believe there’s a path forward

  • Use of Unrestricted Subsidiaries: The aggressive move to park sale proceeds in an unrestricted sub was legal, but it nearly prompted conflict. Tactics like shielding assets in unrestricted entities may give a sponsor leverage, but they can also erode trust with creditors and invite scrutiny. A more collaborative approach (using a portion of those proceeds to reduce debt in exchange for covenant relief) might preserve relationships. Ultimately, Hearthside’s trapped cash ended up back in play – proving such maneuvers might only delay the inevitable and could sour negotiations.

  • Engage and Cooperate with Creditors: Once insolvency is apparent, the sponsors did wisely pivot to a cooperative stance – e.g. allowing a Special Committee, signing the RSA, and not impeding the plan. Lesson: Early collaboration with creditor advisors and embracing independent governance can facilitate a smoother restructuring and win goodwill that translates to favorable treatment (like liability releases). Fighting against aligned creditors (especially when covenants and economics are not on your side) usually just burns value and can hurt future deals.

Outcome for Sponsors: The sponsors in this case lost their entire ownership, which is a hard ending for their funds. It becomes readily apparent that the sponsor`s over-paid and over-levered (Hearthside was ~15x levered on EBITDA by the end) ,an asset that is still a viable business with a reasonable capital structure. Creditors took over, and the company itself survived and is now on better footing.

The people aspect gets glossed over a lot - Hearthside had 12,100 employees, 11,000 of which were permanent folks. Thankfully, operations didn’t halt during the restructuring, with all 28 facilities continuing to keep running and fulfilling orders.

Hearthside (now Maker’s Pride) emerges with a fresh start: a de-levered balance sheet and $200mm of new equity funding, plus an owner group that could write a check if needed. The hope is that a lower leverage profile will be sustained given the dynamics we discussed around customer volume sensitivity.

With a lower leverage profile, this business might just work. Ultimately, far too much leverage was slapped on this business by the 2018 sponsor group.

Until next time.

-Harry

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