How hedge funds killed Twinkie The Kid

Posted by AzBlueMeanie:

Twinkie-the-kid-200When I first read the headline the other day that the owners of Hostess bakeries have decided to liquidate the company in bankruptcy and go out of business, the inner child in me screamed "Nooo!" No more Twinkies? No more Ding Dongs? No more fruit pies? Another iconic part of my childhood was disappearing into history.

The corporate "lamestream" media immediately parroted the owners of Hostess Brands and blamed it on a labor dispute with their Bakery Workers unions. As always, upon closer examination of the facts, this turns out to be bullshit. The unions actually made concessions.

The real villains here are the vulture capitalist hedge fund owners of Hostess' debt who killed Twinkie the Kid by profit taking through liquidating the company in bankruptcy.

CNBC's John Carney explains in How Hostess Failed: Hedge Funds vs. Unions:

When Hostess Brands announced that it would close up its operations,
the forces most responsible for that decision were two hedge funds that
control hundreds of millions of Hostess debt
and which have finally
decided they won't squeeze any more filling into the Twinkie.

The
funds, Silver Point and Monarch
, are what are known as distressed debt
investors. They buy the debt of troubled companies—usually at steep
discounts. Some consider them white knights who are willing to take make
risky investments in companies on the verge of failure. Others say they
are “vulture funds.”

Only
Silver Point and Monarch could have kept Hostess out of liquidation and
kept the Twinkie bakery ovens firing. But they were, ultimately, unable
to reach a deal with the unions that represents the workers who make
and deliver products like Twinkies, Wonderbread and Ding Dongs. Without
large union concessions—what some would say, total union
capitulation
the hedge funds decided Hostess would have to die.

This
is not the first time Hostess Brands has entered bankruptcy. Weighed
down by an balance sheet heavy with debt and pension obligations, costly
labor rules, and declining sales, the company sought bankruptcy
protection under Chapter 11 in 2004.

After
nearly five years in bankruptcy, Hostess emerged in 2009 under the
control of a private equity firm called Ripplewood Holdings
, which
invested $130 million of new capital in the company. The keys to coming
out of the bankruptcy the first time around were concessions by the two
groups most responsible for Hostess falling back into bankruptcy just 3
years late: the unions and lenders that owned secured company debt
nominally worth around $450 million.

In
the deal that allowed Hostess to come out of bankruptcy, the unions
agreed to concessions that would save the company around $110 million a
year in labor costs.
The lenders, led by the hedge funds Silver Point
and Monarch, agreed to provide a new secured loan of $360 million,
forgive half the existing debt, and exchange the rest of that debt for a
payment-in-kind loan.

It’s worth mentioning that we don’t know how much of a loss—if
anything—Silver Point and Monarch took on the loans by agreeing to
reduce the amount outstanding. As David Kaplan pointed out in his extensively detailed article in
the August 13th issue of Fortune, the amounts the hedge funds paid for
the debt are not in the public record. Distressed debt funds—critics
call them vulture funds—typically pay far less than face value when
buying the debt of troubled companies.

This wasn’t enough to save the company.

The
company’s sales declined and attempts to roll-out new products more in
line with changing consumer tastes flopped. Ripplewood put tens of
millions more into the company in the form of new equity and
subordinated debt. Silver Point and Monarch put in another $30 million
and then, after the company filed for Chapter 11 again in January of
this year, another $75 million.

What
happened next was just a mess. The CEO quit. The unions described the
pay of the new CEO as “looting.”
Acrimonious would be a very mild term
to describe relations between management and the unionized workers. One
person familiar with the matter described it as “all-out war.” The place
to turn for the details of this is, again, David Kaplan’s Fortune article.

Ripplewood basically fell out of the picture
during this period. Its equity investment was worthless, and it’s
subordinated debt was deeply underwater. It just stopped showing up at
negotiations with the unions, according to Kaplan.

The folks left at the negotiating table with the unions were Silver Point and Monarch.

Here’s how Kaplan put the situation as of last summer:

What
the hedge funds want is some degree of capitulation from a union whose
members will otherwise lose thousands of jobs in liquidation. If the
hedge funds don't get it, they've concluded, the company isn't worth
saving. Without the hedge funds' blessing, no Hostess turnaround is
possible. Right now, according to sources with knowledge of Hostess's
debt structure, Silver Point and Monarch each hold Hostess obligations
with a market value of between $50 million and $100 million. Those
sources also say each hedge fund probably paid somewhere between $125
million and $175 million for that debt. So even with losses to date,
both hedge funds have ample skin in the game — skin they'd like to get
out of the game sooner rather than later. Of course, if the hedge funds
again forgive sizable debt, they'll probably want sizable equity in
return this time.

Finally, there are the
woebegone Teamsters. They have plenty of skin as well — and feel as if
they've been fleeced out of almost $100 million from Hostess after the
company "temporarily" ceased making union pension contributions last
August
. That move by Hostess was a breach of its collective-bargaining
agreement with the unions.
The Teamsters' leadership has fulminated to
its membership about the hedge funds in particular. "The financial folks
make a living of feeding off distressed companies," Hall says.
"They
lose sight of the fact that there are real families with livelihoods at
stake." At local unions across the country, the hedgies have become the
devil incarnate.

Now
we know how this story ends. The Teamsters agreed in September to a
deal with reduced pay and benefits. But the Bakery Workers union
rejected the deal and went on strike. Hostess warned that if the strike continued it would not be able to stay in business. But the strike went on. And now Hostess is out of business.

The hedge funds concluded that Hostess isn’t worth saving.

* * *

Although it now appears that Hostess is done, this is not the end of the
story. The brands Hostess owns retain value. Someone will likely
produce Twinkies again. The plants and workers are also valuable and
will likely find bidders. Silver Point and Monarch—as well as the other
secured creditors—will realize some value for their investment in the
company
, although certainly far less than they had hoped. (But, since we
don’t know how much they spent on the debt, we may never know whether
they gained or lost on the deal.)

Some other corporation may produce a product that they call Twinkies, and Ding Dongs and fruit pies, but I doubt that it will ever be the same.

As AFL-CIO President Richard Trumka said in a statement,
"What’s happening with Hostess Brands is a microcosm of what’s wrong
with America, as Bain-style Wall Street vultures make themselves rich by
making America poor."

0 responses to “How hedge funds killed Twinkie The Kid

  1. I think that these companies should be turned over to the Unions with the eventual turn over to a Employee Owned Operation. The running to Bankruptcy court by venture capitalists should result in them getting a value of 1c per 1.00 of their initial investment. They may not run to this option if they knew it would not pay them for doing so.