National cleaning products company files Chapter 11 bankruptcy

The Guilford, Conn., provider of cleaning products and protective equipment files for Chapter 11 bankruptcy seeking a sale of its assets after miscalculating demand for its products after the Covid pandemic subsided.

May 24, 2024 - 06:30

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National cleaning products company files Chapter 11 bankruptcy

The Covid-19 pandemic had a severe effect on many businesses as the amount of Chapter 11 bankruptcy filings was significantly higher in 2020 compared to 2019.

For example, bankruptcy filings by companies with asset value greater than $50 million increased by nearly 200% in 2020 compared to 2019, according to an American Bar Association study.

As normalcy returned to businesses in 2021, government stimulus programs also benefitted companies and helped reversed the rising bankruptcy trend, as the amount of Chapter 11 filings was 28% lower than 2019.

The pandemic, however, was too much for several retail chains that needed to file bankruptcy. David's Bridal and Party City reorganized and exited bankruptcy, but other retailers like Bed Bath and Beyond, Tuesday Morning and Christmas Tree Shop filed for Chapter 11 bankruptcy and eventually liquidated.

One company that benefitted from the Covid pandemic initially in 2020, saw its fortunes reverse the following year as the pandemic subsided and companies that had previously provided essential cleaning and safety products for customers were no longer in high demand.

Covid misjudgment sends Supply Source Enterprises into bankruptcy

Supply Source Enterprises, a leading provider of branded and private label cleaning products and personal protective equipment, on May 21 filed for Chapter 11 protection to seek a sale of its assets after miscalculating demand for its inventory after the Covid-19 pandemic. Supply Source brands include The Safety Zone and Impact Products.

The Guilford, Conn., debtor listed $50 million to $100 million in assets in its petition and $180 million in funded debt, which includes $80 million owed on a term loan credit facility, $60 million owed on an asset-based loan, and about $40 million in unsecured debt.

Before the Covid-19 pandemic, which generated huge demand for cleaning supplies and personal protective equipment in 2020, Supply Source had been consistently profitable with stable single-digit growth, according to a declaration from the debtor's Chief Restructuring Officer Thomas Studebaker. Once the pandemic hit in 2020, the debtor had substantial growth due to high demand for safety, hygiene and sanitation products

The debtor reported adjusted Ebitda of $93 million in 2020 which was nearly a 300% increase over the previous year. However, the company's financial performance deteriorated in subsequent years.

Based on the unprecedented demand in 2020, the company commissioned an industry study in early 2021 that concluded that the Covid-19 pandemic would fundamentally change the cleaning supplies and protective equipment industry and market for its products. The study also estimated that the company's Covid-related growth would likely be sustained through 2024.

In contemplation of continued customer demand at elevated prices, based on the study's data, the debtor increased purchases of inventory even though the costs were higher due to supply chain constraints during the pandemic. Despite the study's assurance that growth would be sustained for years, the pandemic's positive effect on the market faded by the end of 2021 and demand for PPE decreased to normal rates.

To make matters worse, some of the debtor's customers ordered at lower than normal rates due to several factors, including work from home policies that decreased a need office building cleaning supplies, a rise in home schooling that reduced the need for school cleaning supplies, and changes in daily hotel cleaning policies.

The reduction in demand led to large amounts of excess inventory that the company could not sell in the same quantities and prices. The excess inventory forced the debtor to secure additional storage space, which increased storage costs.

In fall 2023, the company commissioned another study of its distribution network that led to a transfer of warehousing operations from Toledo, Ohio, to Richmond, Va.

These factors tightened the company's liquidity and led to a decline in annual revenue in 2023 by 26% from 2022, resulting in a negative 2023 Ebitda of $13 million. The debtor's liquidity issues led to it being overdrawn on its asset-based loan facility by $30 million. The ABL lender in February 2024 swept the debtor's bank accounts, further impacting the company's financial distress.

The debtor in January 2024 sought strategic alternatives and in February 2024 began marketing the company for sale. The company decided it's best option was to seek a sale of its assets in a Chapter 11 filing to a stalking-horse bidder, Hospeco Brands Group, which has committed to provide up to $60 million in debtor-in-possession financing.

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