Brennan Family Foods

Company overview

Brennan Family Foods makes bread, rolls and snack cakes from two bakeries in Pennsylvania and sells them to grocery chains and convenience stores across the Mid-Atlantic. The Brennan family has owned it for three generations; the current CEO, Margaret Brennan (67), plans to hand over to her son, who runs operations, within five years. There is no private equity owner.

Brennan's bank wants to reduce its exposure to the sector, so the company is refinancing with a private credit lender. It is asking for a $40M senior secured term loan and a $10M revolving credit facility that would be undrawn at closing. The term loan repays the $30M bank loan, pays for a $6M high-speed oven line that management expects to add capacity for a new snack range, covers $1M of fees and leaves $3M of cash on the balance sheet.

The largest customer, Keller's Markets, a regional grocery chain, buys about 26% of Brennan's sales on one-year supply agreements. Flour and energy are the main input costs; in FY2022 a spike in both squeezed margins before Brennan could raise prices.

The IC question: is this a business you would lend to for five years without a sponsor behind it, and do the terms protect you if the largest customer cuts back or costs rise again?

Your memo should answer

1. 01Would you approve this loan? State your recommendation and the main reasons.
2. 02What are the two or three most important credit risks for a family-owned company like this one?
3. 03Calculate leverage, interest coverage, fixed charge coverage and free cash flow after debt service. Assume SOFR of 4.0%.
4. 04Build a downside case: Keller's cuts its orders by a third and margins fall back to the FY2022 level. What happens to leverage, fixed charge coverage and covenant headroom?
5. 05Do the covenants and terms protect the lender? What would you change, given there is no private equity owner?

Financials ($M)

Term sheet

Facilities

$40M senior secured term loan; $10M revolving credit facility, undrawn at closing

Security

First lien on all assets, including both bakeries (owned, not leased)

Uses

Repay bank loan $30M; new oven line $6M; fees $1M; cash to balance sheet $3M

Tenor

5 years (2031); revolver also 5 years

Pricing

SOFR + 475 bp; 1.0% upfront fee; revolver 0.50% on undrawn amounts

Amortization

5% a year ($2.0M), paid quarterly

Financial covenants

Maximum total leverage 3.25x; minimum fixed charge coverage 1.25x (EBITDA less capex and cash taxes, over interest plus scheduled amortization); tested quarterly

Family distributions

Up to 50% of excess cash flow each year, only while leverage is below 2.50x

Other terms

Key-person clause: lender approval needed for a new CEO; personal guarantees not offered

Pricing context

Sponsorless loans to $10–25M EBITDA companies recently priced at SOFR + 450 to 600 bp

Customers and costs (FY2025)

Keller's Markets

26% of sales · one-year supply agreement, renewed each January since 2014

Next four customers

31% of sales combined (two grocery chains, a convenience-store distributor, a club store)

All other customers

43% of sales, over 300 accounts

Cost structure

Flour and other ingredients 38% of sales; packaging 9%; energy 5%; labor 24%

FY2022 margin squeeze

Flour up 31% and natural gas up 45%; price increases took about 9 months to pass through

New oven line

Adds about 12% capacity; management expects $1.5–2.0M of extra EBITDA from 2027 once the snack range is listed