Food Bankruptcy Week: Thursday - Hearthside Food Solutions. Unsecured - $.06 for every $1 owed.

What Happens When a Giant Food Manufacturer Has $2 Billion Too Much Debt?

Hearthside Food Solutions wasn't some struggling little snack-food bakery. It was described as the largest food contract manufacturer and largest private bakery in the United States, producing and packaging food for some of the world's biggest consumer brands.

Scale? Check.

Major customers? Check.

Dozens of manufacturing facilities? Check.

Huge revenue base? Check.

Bankruptcy? Check! They filed Chapter 11 on November 22, 2024, with a restructuring designed to eliminate approximately $1.9 billion of debt from the balance sheet.

$1.9 BILLION OF DEBT REMOVED FROM THE BALANCE SHEET? How does that work?

You don't just remove nearly $2 billion from a balance sheet. Somebody takes the hit.

Junior creditor classes — including unsecured creditors — were initially projected to recover up to 6% of their allowed claims. That's six cents. On the dollar.

Meanwhile, first-lien secured lenders were positioned to receive 100% of the equity in the reorganized company in exchange for their claims. Apparently that "secured creditor" thing matters.

Then came another wrinkle. The Creditors Committee representing unsecured creditors objected to Hearthside's proposed executive incentive program, which could have paid $24.1 million to 8 executives. Their complaint?

The proposed incentive p ool was roughly 10X the amount then set aside for junior creditor recoveries. Ouch. For many creditors, it was probably more like:

OUCH!!!

A supplier looking at Hearthside before the bankruptcy could easily have taken comfort in the companies whose products ran through its facilities. Huge consumer brands. Massive production runs. National distribution.

What could go wrong?

Should They Have Seen It Coming?

Maybe. And here's where this story gets uncomfortable. There were some very sophisticated companies among Hearthside's unsecured creditors. Companies with professional credit departments. Finance teams. Lawyers. Risk departments. Supplier Contracts. And access to far more information than the typical mid-market supplier. And they still ended up exposed.

So it's fair to ask:

If they didn't see it coming, how was a mid-market supplier supposed to?

But there's another side to that question. Because there were warning signs. Big ones.

In February 2023, a NYT’s investigation alleged that migrant children — some working overnight shifts in hazardous conditions — had been placed in Hearthside facilities through outside staffing agencies. The story brought national attention, government investigations and intense scrutiny of Hearthside's labor practices.

Hearthside responded aggressively. The company said it was "appalled" by the allegations.

It denied knowingly employing underage workers. It severed relationships with certain staffing agencies, strengthened employment practices and launched an outside review.

In other words:

They said the things companies are supposed to say when a crisis hits.

And that's where credit gets difficult. Plenty of credit professionals saw the headlines. Plenty probably asked questions. And plenty may have accepted the answers.

Because Hearthside was still operating.

The company wasn't saying: "Hey everybody, we're about to restructure nearly $2 billion of debt."

Because companies rarely announce: "Hey, um, yeah. Just so you're aware… we're kind of screwed."

But by 2024, the financial warning signs were getting harder to ignore. In June 2024, S&P downgraded Hearthside deeper into junk territory to CCC- and said a default, bankruptcy filing, distressed exchange or debt restructuring was likely within six months.

By October, Bloomberg reported that Hearthside had been consistently burning cash since its 2018 private-equity buyout, had years of weak earnings and was running out of room to deal with roughly $2 billion of debt. A month later, Chapter 11 arrived.

So yes:

Some creditors probably should have seen trouble coming.

But that's exactly why hindsight is dangerous in credit. After the bankruptcy, everybody can find the warning signs.

Just like I can describe what's around the corner after we've already driven around it.

Lesson 1: Warning signs are considerably harder to interpret while the customer is still paying you.

And that's where those sophisticated unsecured creditors matter.

If companies with experienced credit departments, financial professionals and outside advisers can still get caught—

what chance does the typical mid-market company have?

A $75 million or $150 million manufacturer might have one credit manager. That person may also be handling collections, deductions, customer setup, credit limits, sales requests and half a dozen other things before lunch. They don't have a forensic accounting team studying every customer. (FYI. I know who does).

And frankly, they shouldn't need one.

In fact, a credit manager can do everything a good credit department is supposed to do—

and still not get it right. Which changes the credit question entirely.

Let's move from: "You should have known."

To: "You don't have to know."

That's one of the reasons companies use trade credit insurance. An individual mid-market supplier may not have the leverage to demand current financial statements from every large private customer. An insurance carrier covering exposures across hundreds or thousands of suppliers often has a much broader view of that buyer's creditworthiness.

You don't need 200 underwriters. The insurance market already has them.

And a risk-transfer strategy allows you to continue selling with coverage until the carrier says:

Going forward, we are no longer willing to insure this exposure. At that point, you still get to make the business decision:

You can continue selling. You can stop. You can tighten terms. You can require security.

Or you can keep some exposure intentionally.

But now the question becomes:

How much can we afford to lose?

Maybe that's your new unsecured credit limit. Not what you'd like to sell them. Not what they historically bought. Not what Sales wants.

What can you actually afford to lose?

Lesson 2: The Crescendo Take

This is why I push back whenever someone tells me: "They're too big to fail." Fine.

Maybe the enterprise survives. That's not the credit question.

The question is: Will I get paid?

And the uncomfortable truth is: You cannot know for certain.

Until you get paid, you aren't paid. Trade credit insurance isn't simply about protecting yourself against companies that disappear. It's about intentionally determining how much unsecured exposure belongs on your balance sheet.

Because sometimes the most sophisticated credit decision isn't predicting the bankruptcy before everybody else. It's recognizing that you might not be able to predict it.

Decide in advance how much of that risk you're willing to keep. Because sometimes the biggest risk isn't that your customer goes away….

It's that they survive…

after paying you a whopping $.06 on the dollar.

Crescendo Trade Risk -

Sell More | Risk Less.