A national outcry over the use of the trimmings followed a March 7 "ABC World News Tonight" report, during which a former U.S. Department of Agriculture inspector called BLBT "pink slime." The public's appetite for beef products -- with or without BLBT -- declined afterward and exacerbated AFA's two-year battle with falling cash flow.

The King of Prussia, Pa., beef processor, which is owned by affiliates of private equity firm Yucaipa Cos. LLC, filed for Chapter 11 in the U.S. Bankruptcy Court for the District of Delaware in Wilmington with eight affiliates, including main unit AFA Foods Inc.

The group of debtors processes more than 500 million pounds of ground beef annually and distributes its products to restaurants and grocery stores in the U.S.

AFA plans to fund operations through a sale with the use of cash collateral as well as a $56 million debtor-in-possession loan from GE Capital Corp. and Bank of America NA.

The DIP is priced at 275 basis points over the highest of prime, the federal funds rate plus 3% and LIBOR plus 1%.

AFA owes $12.1 million on a first-lien term loan and $47.9 million on a first-lien revolver with GE Capital and BofA. The debtor also owes $75.6 million on second-lien debt with Yucaipa Corporate Initiatives Fund II LLC as agent.

According to court documents, the DIP will roll up $4.9 million of overadvances on the prepetition debt. AFA will also pay down all of the first-lien debt through receipts from its cash collateral over time.

Judge Mary F. Walrath on Tuesday approved first-day motions, including joint administration of the debtors' cases and interim use of cash collateral and the DIP. A final hearing is set for April 24.

Under the DIP, AFA has until April 16 to file a bidding procedures motion.

AFA blamed its struggles to generate substantial Ebitda over the past two years on a highly competitive beef processing industry that's cursed by overcapacity. The debtor also cited decreased retail demand, costly customer-specified requirements for finished product testing and lower sales in certain foodservice markets.

Nor did it help that AFA had little wiggle room with profitability. The pricing of AFA's raw materials and many of its products are based on USDA national pricing indexes, which leave the meat processor with thin margins, court papers show.

AFA also took a strategic leap that didn't work out as planned. Even though all of the significant foodservice companies were already customers, AFA attempted to increase sales to retail customers at the expense of some of its foodservice clients. Such a transition, court documents said, "put a significant strain on the debtors' resources," but it was succeeding until the BLBT controversy, court filings said.

AFA uses BLBT in the making of many of its products according to customer specifications. The company, however, contends it doesn't rely on the product, which is created by taking USDA-inspected fat trim of beef and separating the lean meat from the fat through a low-temperature rendering process. The result is a 93% lean beef product. BLBT is then exposed to food-grade ammonium hydroxide gas to destroy E. coli and other bacteria.

The "ABC World News Tonight" report shined a spotlight on the product and led to calls to cut or eliminate sales of meat containing BLBT.

The media coverage hurt AFA sales and increased its working capital needs, as it had to transition to a new BLBT-free product, court papers said.

AFA, which has 850 employees, had $958 million in revenue in 2011.