Orchard Foods · ORCH
DEMO DATAUNDERWRITING ASSUMPTIONHOLDOrchard Foods — Subordinated Notes 8.25%
Proposed investment
Returns
| Base IRR (p=55%) | 10.5% | FAIL |
| Downside IRR (p=30%) | 7.3% | PASS |
| Severe downside IRR (p=15%) | -6.3% | |
| Probability-weighted IRR (of expected cash flows) | 6.7% | FAIL |
| MOIC base / downside / severe | 1.32x / 1.21x / 0.77x | |
| Required IRR (hurdle) | 12% | |
Credit
| Net leverage (FY2025A) | 4.3x | max 6.0x |
| Interest coverage (EBITDA / interest) | 3.12x | |
| Liquidity | $150M | |
| Covenant headroom (base, minimum) | 33% | min 15% |
| Credit score | 67 / 100 | Moderate |
| Next maturity | 2029 | |
Downside
| Recovery (downside / severe) | 100% / 39% |
| Loss given default (severe) | 61% |
| Default period (downside / severe) | none / FY2029E |
| Probability of default (weighted) | 15% |
| Expected loss | 9.1% |
| Recovery needed for MOIC 1.0x | 61% of face |
Key risks (largest first)
- Refinancing: $800M maturity in FY2030E; only $291M projected liquidity; $509M refinancing requirement.
- Severe-case valuation recovery of 39% is below the 94.0 purchase price: a 61% loss given default.
- Severe case produces a payment default in FY2029E.
- Unsecured, rank 4: $1.7B of debt ranks ahead.
- Elevated leverage: net debt / EBITDA 4.3x.
Key protections (strongest first)
- Coverage of 3.12x EBITDA / interest; EBITDA can fall 68% before coverage reaches 1.0x.
- Base-case refinancing tests pass for all 2 maturing tranche(s); 1 are repaid from cash.
- No covenant breach in the Downside case.
- Defensive demand
- Pricing power on brands
Catalysts
- Portfolio rationalization
- Commodity cost declines
Diligence — 5 unresolved high-priority item(s)
Tracker →- Historical financials tied to filings — In ProgressDo model inputs reconcile to audited statements?
- Quality of earnings / EBITDA add-backs — In ProgressHow much of adjusted EBITDA is add-backs?
- Debt documentation review — Not StartedPriming / drop-down protections and baskets?
- Covenant package and definitions — Not StartedCovenant EBITDA definition and headroom?
- Maturity profile and refinancing plan — In ProgressIs the refinancing plan credible at current leverage?
Investment thesis
Defensive end market but 4.3x net leverage and volume decline. The subordinated notes at 94 yield ~9.5% and are covered in all scenarios on EV, though this is a carry trade rather than a distressed idea.
The question: Does a 9.7% yield on a rank-4 unsecured claim compensate for 15% probability-weighted default risk and 61% severe-case loss?
Recommendation rationale — evidence from the model
HOLDHOLD (do not size yet): Base-case IRR clears hurdle (10.5% vs ≥ 12.0%); Expected-cash-flow IRR (probability-weighted) clears hurdle (6.7% vs ≥ 12.0%); Principal protected in severe case (recovery ≥ price) (39 vs 94.0 vs recovery ≥ price).
| Test | Actual | Required | Weight | |
|---|---|---|---|---|
| ✗ | Base-case IRR clears hurdle | 10.5% | ≥ 12.0% | core |
| ✗ | Expected-cash-flow IRR (probability-weighted) clears hurdle | 6.7% | ≥ 12.0% | core |
| ✓ | Downside IRR stays above floor | 7.3% | ≥ 0.0% | core |
| ✓ | Downside recovery meets minimum (valuation waterfall) | 100.0% | ≥ 60.0% | core |
| ✓ | Base-case refinancing succeeds | PASS | PASS | core |
| ✓ | Entry yield meets minimum | 9.7% | ≥ 9.0% | secondary |
| ✓ | Net leverage within maximum | 4.3x | ≤ 6.0x | secondary |
| ✓ | Covenant headroom (base case, minimum) | 32.9% | ≥ 15.0% | secondary |
| ✗ | Principal protected in severe case (recovery ≥ price) | 39 vs 94.0 | recovery ≥ price | secondary |
| ✗ | No unresolved high-priority diligence | 5 open | 0 open | secondary |
Rule: PROCEED if all five core tests pass and ≤ 2 secondary tests fail; PASS if the base case and the downside both fail, or ≥ 3 core tests fail; otherwise HOLD. Thresholds (hurdle 12%, min downside IRR 0%, min yield 9.0%, max leverage 6.0x, min recovery 60%, min covenant headroom 15%) are configurable per case. The Excel Investment Summary tab implements the same rule by formula.
What would change my mind?
- EBITDA declines more than 68% from FY2025A (coverage < 1.0x) — or more than 26% (first covenant breaks).
- The entry price is above 90.5: the base case no longer earns the 12% hurdle (assumed price 94.0).
- Severe-case recovery returns the purchase price only if the distressed valuation multiple is at least 7.6x EBITDA (the severe case assumes 6.5x); the question is how much cushion we want.
- Collateral / enterprise value falls more than 27% from the base-case valuation: the tranche starts to take losses.
- Market access weakens: base-case pro-forma coverage at refinancing is 3.34x vs the 1.20x test, at an assumed 8.0% refinancing rate — a higher spread or lower EBITDA flips the test.