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Archway joins growing list of PE-backed bankruptcies

Catterton Partners-owned cookie maker Archway & Mother’s is the latest private equity-backed company to file for bankruptcy. Standard & Poor’s estimates that ‘a disproportionate number’ of speculative-grade defaults in the next two years will be private equity-backed companies.

Cookie maker Archway & Mother’s, a portfolio company of Connecticut-based Catterton Partners, has filed for bankruptcy to facilitate a wind-down of its operations.

The Michigan-based company said it was forced to seek Chapter 11 protection because of the challenging economic environment and increasing costs of raw materials and fuel. Archway said in its bankruptcy filing that its thirty largest creditors hold unsecured claims totaling $27.3 million.

Mother's Cookies: no
more sweet returns

Archway is at least the 34th private equity-backed company to declare bankruptcy this year and the second cookie company. On 24 August, Mrs. Fields Famous Brands, backed by mid-market buyout shop Capricorn Holdings, filed for bankruptcy due to inability to service its debt obligations.

Other private equity firms that have had their portfolio companies declare bankruptcy include Sun Capital Partners, which has had five bankruptcies so far this year, and Cerberus Capital, which had two.

Catterton purchased Archway in 2005 from the North American bakery group of Parmalat Bakery & Dairy, a subsidiary of Italy’s Parmalat Finanziara, for an undisclosed sum. In December 2003, Parmalat Bakery & Diary had filed for bankruptcy protection in New York.

Catterton said it “took a number of actions” to bring Archway back to profitability, including obtaining additional financing and selling the company, but such efforts proved insufficient.

“As you know, the credit environment is certainly difficult at this time. Closing the facility and filing for bankruptcy was the only option available,” said Meaghan Repko, a spokeswoman for Catterton.

The Archway bankruptcy is unlikely to be the last private equity-backed bankruptcy this year.

Last month, a study of  defaults in 2008 by S&P found that of 55 defaults through 10 September, nearly 70 percent were transactions involving private equity, which “may or may not have facilitated the default”, according to the report.

“Some have had dividend recaps where private equity funds paid themselves, but a common thread was that a lot of leverage was piled on companies, particularly in later stage of the cycle [in 2006 and 2007],” said Diane Vazza, a managing director at Standard & Poor’s and one of the co-authors of the study.

Vazza predicts that between now and the end of 2010, 23 percent of all US speculative grade corporations will experience default, of which “a disproportionate number have had private equity involvement”, according to Vazza.

Catterton, a middle market consumer product specialist, is currently investing out of its sixth fund, which closed in 2006 on $1 billion. Founded in 1990, the firm focuses on buyout and growth investments within the consumer sector, including investments in high-profile companies such as Breyers Yogurt, Build-A-Bear Workshop, and organic juice maker Odwalla.

Catterton is currently raising Catterton Partners VII, a $300 million mid-market growth and buyout fund, according to the Probitas Partners 2008 Private Equity Deskbook.