MRP Solutions: Molded by Distress

Welcome to the 171st Pari Passu newsletter.

Today, we are diving into MRP Solutions, a specialty plastic closures manufacturer backed by Clearlake Capital. In June 2024, MRP completed a comprehensive liability management exercise to address its $500mm+ capital structure. The transaction stands as one of the first uptiers to gather 100% participation, marking the beginning of what many have called “LME 3.0” and helping set the precedent for many future LMEs.  

In this write-up, we’ll walk through MRP’s business model and corporate history, the factors that drove its distress, and the mechanics of its 2024 LME. We’ll then analyze the transaction’s impact on liquidity, leverage, and creditor recoveries, before concluding with key takeaways on the evolution of liability management exercises.

Before we get into MRP’s history, it’s important to understand the company’s manufacturing process and business model. Valcour Packaging, LLC (d/b/a MRP Solutions) is a specialty manufacturer of injection-molded plastic packaging components, primarily closures, caps, lids, and jars. To begin, it’s important to understand the nuances of MRP’s manufacturing process. Thermoplastic injection molding is the process of heating plastic and injecting it at high pressure into steel molds. These molds dictate the precise dimensions of the final product, and once cooled, the plastic part is ejected, and the cycle repeats, often taking just 2 to 10 seconds per part. 

MRP primarily sells into the nutraceuticals (supplements), pharmaceuticals, specialty food, and personal care end markets [1]. For example, MRP might design and produce the child-resistant closure (CRC) lid of a multivitamin container or the dispensing closure of a shampoo bottle. 

The first step of MRP’s manufacturing process involves close collaboration between MRP and the customer to design a component tailored to a specific product line. This includes detailed work on dimensions, material selection, and regulatory requirements, among other things. This amount of upfront design effort embeds MRP into its customers’ production process, resulting in quite sticky customer relationships, as switching costs may be significant. 

Once a design is finalized, a custom steel mold is manufactured. Tooling (the fabrication of steel molds) is one of the most capital-intensive steps in the process, with molds for complex closures costing anywhere from $50,000 to $500,000, depending on cavitation (the amount of identical parts produced per cycle) and complexity. MRP maintains a library of over 10,000 SKUs, enabling it to differentiate itself from larger, more commoditized injection-molding companies through a short-run, high-mix production model [1]. However, this dynamic also leads to a higher fixed cost base, which worsens unit economics if volumes decline. 

The next step is injection, in which thermoplastic resin pellets are melted and injected into the steel molds under a highly automated process. Resin pellets, therefore, are the highest variable cost for MRP. Typically, customer contracts include cost pass-through mechanisms for any price fluctuations in resin, but rapid price increases may still temporarily shrink margins. MRP uses two categories of resin: virgin (new) and post-consumer-recycled (PCR). Since 2023, as sustainable packaging has grown in popularity, MRP has invested in the capabilities to run PCR resin [1]. This is another notable differentiator for MRP, allowing the company to command premium pricing for sustainability-oriented customers. 

Lastly, following injection, parts are cooled, ejected, and subjected to quality control. For much of MRP’s end markets, such as food and pharma, quality requirements are quite stringent. Importantly, this reinforces customer stickiness, as brand owners must re-qualify for select certifications when switching suppliers. 

In addition to the factors detailed above, MRP primarily differentiates itself through its domestic manufacturing facilities, which can reduce lead times and supply chain risk, providing a viable alternative to overseas part sourcing. MRP currently operates manufacturing facilities in Plattsburgh, New York, Twinsburg, Ohio, and Somerset, New Jersey [1].

Note, to ensure speed of research and accuracy, given the private nature, we relied on AlphaSense’s (our sponsor) private company deep research tools, which were particularly helpful in piecing together MRP’s history and competitive positioning (you can sign up for a free trial here).

MRP’s roots trace back to 1976, when Geoffrey Titherington founded Mold-Rite Plastics in Plattsburgh, New York. For the next three decades, the company operated as a family-owned regional injection molder, building expertise in closures and caps, particularly CRC parts. By 2010, Mold-Rite had grown to over 350 employees and established itself as a leading regional manufacturer serving the pharmaceutical, nutraceutical, and personal care markets [2]. 

In 2010, Irving Place Capital (IPC), a middle-market private equity firm, acquired Mold-Rite from its founding family. While financial terms of the deal were not disclosed, IPC framed the acquisition as a platform investment in the caps and closures segment [2]. 

In November 2012, IPC pursued two key add-on acquisitions, which would create the modern MRP Solutions. The first acquisition was that of Weatherchem Corp., based in Twinsburg, Ohio. The Weatherchem acquisition brought the iconic “Flapper” dispensing closure into Mold-Rite’s portfolio.  While Weatherchem's 1983 Flapper patent has expired, as the first mover in the space, theflapper remains an industry standard today for spice and dry-goods packaging and helped Mold-Rite establish a strong foothold in the dry-goods segment, as Weatherchem controlled up to 60% of the dry-goods closure market at the time of the acquisition [3].

Next, IPC acquired Stull Technologies, based in Somerset, New Jersey. This acquisition continued to expand Mold-Rite’s portfolio, including its CRC offerings. While the financial details of these add-ons were not disclosed, it’s clear that under IPC ownership, Mold-Rite transformed from a family-owned regional molder into a dominant national injection-molding platform, with more than 10,000 SKUs [4].  

In October 2021, Clearlake Capital, a Santa Monica, California-based PE fund, acquired Mold-Rite from IPC. Clearlake highlighted the company’s vast IP library and exposure to “recession-resilient end-markets” [4]. At the time, Mold Rite was generating around $280mm in revenue [6]. Considering the company’s 2022 EBITDA margin of 23%, and also accounting for operating leverage, we estimate 2021 EBITDA of $65mm - $70mm (~23% - 25% margin).

While the exact financials surrounding the deal were not disclosed, market commentary suggested a valuation of ~$1bn [10]. Given our EBITDA estimate above, this implies a valuation multiple of 14.0x - 15.0x. Additionally, Clearlake funded the buyout with a $580mm credit facility, comprised of a $420mm first-lien TLB due 2028 and $160mm second-lien TLB due 2029, implying an LTV of 58% and aggressive entry leverage of approximately 8.0x - 9.0x EBITDA [5]. The facilities were priced at S + 3.75% and S + 7.00%, respectively. Additionally, MRP secured a $35mm ABL facility commitment, due 2026 and priced at S + 1.50% [12].

Following the acquisition, Clearlake began to further professionalize the company. In 2022, it appointed healthcare manufacturing veteran Jim Fitzgerald as CEO and rebranded Mold-Rite to MRP Solutions [1]. In 2023, MRP opened its new headquarters and innovation Center in Lake Forest, Illinois. This new facility was meant to accelerate the custom development of new parts, further embedding MRP in its customers’ supply chains. 

Despite the initial positive headlines under Clearlake’s new ownership, cracks were beginning to form. MRP’s path to distress would look similar to many other 2021-vintage LBO’s, in which a highly leveraged capital structure would collide with a rapidly shifting macroeconomic environment. 

Customer Destocking:

MRP’s most immediate operational headwind was a sharp reduction in order volumes driven by customer inventory destocking. During 2020 and 2021, MRP’s end markets, particularly nutraceuticals, experienced a surge in demand as consumers stockpiled health and wellness products during the COVID-19 pandemic. In response, MRP’s customers built up substantial inventory to ensure adequate supply. 

In late 2022, this dynamic reversed as consumer demand stabilized post-pandemic. MRP’s customers, now holding excess inventory, reduced their order sizes with hopes of normalizing inventory levels. As a result, MRP’s 2022 revenue fell by 19% year-over-year to $230mm [6]. As high inflation limited consumer discretionary income, many of MRP’s end markets were negatively affected, as consumers would go on to buy fewer supplements and specialty food products, for example. This effect, combined with continued destocking, would continue into 2023, where MRP’s revenue fell by another 15% to roughly $196mm [7]. 

As we overviewed in the Business Model section, MRP operates a short-run, high-mix production model, maintaining 900 different injection molds across three manufacturing facilities, along with the skilled workforce needed to operate them. In growth periods, such as 2021, this is quite advantageous, as MRP is able to meet a variety of customer needs and run sizes, keeping them in-house. However, during a volume downturn, it became very difficult to absorb these fixed costs. Notably, from 2022 to 2023, as revenue fell by 15% from $230mm to $196mm, S&P estimated that adjusted EBITDA fell from $52mm to $40mm, representing an outsized 24% decrease [7]. 

Excessive Leverage:

As a reminder, when Clearlake acquired MRP in October 2021, the capital structure consisted of a $420mm 1L TL and $160mm 2L TL, both priced at spreads over SOFR. In late 2021, immediately following the acquisition, SOFR remained near zero, following a series of COVID-driven rate cuts. With SOFR at zero, we estimate a total interest expense of $27mm, $16mm from the 1L TL at an effective rate of 3.75%, and $11mm from the TL at an effective rate of 7.00%. At this point, interest coverage remained above 2.0x, given our estimated 2021 EBITDA of $65-$70mm. 

Less than 18 months later, following a series of rate hikes bringing SOFR above 5.00%, MRP’s interest expense more than doubled to $56mm, assuming SOFR of 5.00%. Additionally, given 2023 EBITDA of $40mm, implied interest coverage fell well below 1.0x, meaning MRP could no longer service its debt from operating cash flow. From late 2021 to early 2023, we estimate EBITDA declined by $25mm while interest expense grew by $30mm, resulting in a $55mm adverse swing in cash flow.

Bridging the Gap:

While compressed EBITDA and rising interest costs were the two biggest detriments to cash flow, MRP also faced continued capex and working capital needs, which dragged free cash flow to a deficit of approximately $50mm during 2023 [7]. The table below presents our complete estimates for MRP’s cash burn from 2021 to 2024. 

To help bridge this accumulating cash deficit, in mid-2022, MRP first executed a sale-leaseback of both the Plattsburgh and Twinsburg manufacturing facilities [6]. Notably, while these transactions raised approximately $50m in proceeds, each represents a one-time liquidity source that cannot be repeated. These sale-leasebacks provided one of the first clear signals of MRP’s emerging liquidity needs. 

While at 2022 cash burn rates, these transactions provided a meaningful runway of roughly two years, we know that cash burn continued to accelerate as EBITDA compressed and interest expense grew. As a result, MRP would burn through these proceeds in 2023 and be forced to find another liquidity solution, drawing down more than half of its ABL, which sources indicated raised an estimated $20mm of additional proceeds. 

While the solutions above raised roughly $70mm in incremental liquidity, we estimated at least $120mm of cumulative cash burn over the 2022 to 2024 period. Given that MRP wouldn’t complete any debt raises until mid-2024, it’s clear the company was operating on fumes in the months leading up to the LME. 

In 2024, while EBITDA was projected to rebound in the high-single digits, to approximately $45mm-$50mm, interest, capex, and working capital needs would keep cash flow negative [7]. Based on MRP’s annualized cash burn rates, we estimated the company would run out of cash by mid-2024. Since MRP had already executed sale-leasebacks and an ABL draw, both of which are one-time in nature, it now looked towards lenders for a more comprehensive solution to address its liquidity needs and capital structure overhang. 

By April 2024, MRP’s debt was trading…