Herbalife Supplier Defaults on Debt
Global Health Sciences Inc., a dietary and nutritional health supplement manufacturer, defaulted Wednesday on $257.8 million of debt after failing to make a scheduled $12.4-million interest payment to bondholders.
The default came after the Orange-based company lost much of its business supplying Herbalife International Inc. following the sudden death of Herbalife founder Mark Hughes in May.
Global, which has 1,300 permanent and temporary workers at plants in Orange and Anaheim, said in a statement Wednesday that it is negotiating with its bondholders and will operate on a “business-as-usual basis.”
But its future remains clouded.
Global said it plans to continue to pay its other creditors and that its bankers “have insisted that no payments” be made to the bondholders pending the resolution of negotiations.
It’s not clear where those talks will lead. Joel Luton, an analyst with APS Financial Corp. in Austin, Texas, said bondholders are likely to arrange a sale of the company or a merger in which they would retain an equity stake in the combined business. Global officials declined to comment.
Global has hired Murphy Noell Capital of Westlake Village to help it work out a resolution, such as a restructuring of the debt or finding investors willing to put cash into the company.
According to a Securities and Exchange Commission filing, Global has tapped out its $38-million bank credit line. Additionally, Global said it was in violation of several of the credit line’s lending covenants. Its cash flow was positive in the second quarter but was declining rapidly over previous periods.
Until recently, Global was one of Herbalife’s largest suppliers, but it has seen its business with the Los Angeles diet-product company fall since Hughes’ death.
Global was founded by Orange County entrepreneur Richard Marconi, who helped Hughes develop some of the first Herbalife products 20 years ago. Global does business under several trade names, including D&F; Industries, Raven Industries, Omni-Pak and American Ingredients.
Just three years ago, Global manufactured all of Herbalife’s nutritional products. The business relationship was still growing earlier this year but soured after Hughes’ death.
Much of Global’s debt resulted from a buyout of Hughes’ interest in its predecessor companies for $43 million in 1998. Marconi was paid $38.6 million in the same transaction.
Global could lose all its Herbalife business as early as January, according to SEC filings. Herbalife said it is shifting business to other suppliers to “secure quality products at competitive prices.”
Even with the decline in its Herbalife business, Global still has considerable sales. Global posted sales of $120.4 million through the first six months of this year, with about half coming from Herbalife. But it is losing money, bleeding $18 million in red ink during that period.
