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Global Health Sciences Defaults on Debt

Manufacturing: Herbalife's supplement supplier fails to make $12.4-million interest payment.


Dietary and nutritional health supplement manufacturer Global Health Sciences Inc. defaulted on $257.8 million of debt Wednesday after failing to make a scheduled $12.4-million interest payment to bondholders.

Global, which has 1,300 permanent and temporary workers at plants in Orange and Anaheim, said it is negotiating with its bondholders.

For now, Global will operate on a "business-as-usual basis," according to a company statement. But its future remained clouded.

Global said that 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.

But the company's future was uncertain. According to a Securities and Exchange Commission filing, it 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 International Inc.'s largest suppliers but has seen its businesses with the Los Angeles diet-product company fall since the death of Herbalife founder Mark Hughes in May.

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.

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