RESILIENT MEDIA ENTERTAINMENT : #PRIVATE EQUITY PE-backed Hostess Brands returns to Ch. 11

#PRIVATE EQUITY PE-backed Hostess Brands returns to Ch. 11
BY

Jamie Mason covers corporate bankruptcy as a senior reporter, editing the Letters from Delaware column for the Bankruptcy Insider newsletter. Contact

Private equity-backed Hostess Brands Inc. has gone back into the bankruptcy oven, filing for Chapter 11 almost three years after exiting from its first stay because of the financial toll that labor costs and pension and medical benefit obligations are exacting on the maker of Twinkies and Wonder Bread.

Irving, Texas-based Hostess filed for Chapter 11 in the U.S. Bankruptcy Court for the Southern District of New York in White Plains with five affiliates on Wednesday and has asked that the cases be jointly administered.

The company first filed for Chapter 11 as Interstate Bakeries Corp. on Sept. 22, 2004, in the U.S. Bankruptcy Court for the Western District of Missouri in Kansas City. The debtor exited from bankruptcy protection 4-1/2 years later on Feb. 3, 2009.

Hostess filed for bankruptcy protection again to effect the "fundamental operation and financial changes that the debtors' businesses require in light of their declining performance, aging infrastructure, strained liquidity levels and excessive debt, and the significant challenges facing the debtors, including, but not limited to, uncompetitive and unsustainable labor and legacy costs and an intensified competitive environment," CEO Brian J. Driscoll said in a declaration filed with the court.

Since its 2009 exit from Chapter 11, the debtor's financial performance hasn't kept pace with the projections set forth in its reorganization plan. For the 2010 fiscal year, the company had a net loss of $138 million, and for the fiscal year ended May 28, 2011, the company had a $341 million net loss, court documents said.

Hostess blamed its economic trouble on high legacy costs such as pension and medical benefits, inflexible labor work rules and structures, and unsustainable debt levels.

The debtor owes $860 million in prepetition secured debt in four tranches
Hostess has secured a $75 million debtor-in-possession loan to fund its second Chapter 11 case from Silver Point Finance LLC, Monarch Alternative Capital LP, Gannett Peak CLO I Ltd. and Credit Value Partners LP. Monarch's affiliates hold 8.59% of Hostess' equity.

The DIP is priced at LIBOR plus 1,200 basis points or an alternative base rate plus 1,100, with a 300-basis point floor on LIBOR and a 400-basis point floor on the alternative base rate. If the company defaults on the DIP, the interest rate increases by 200 basis points.

The DIP matures in one year or the plan's effective date, whichever comes first. The DIP carries a $500,000 administration fee, a 12% unused line fee and a 3% funding premium, court papers said.

The DIP has a $200,000 carve-out for professional fees.

The DIP appears to be all new money.

Under terms of the DIP, the company must file a motion to reject its collective bargaining agreements within 14 days of the petition, file a Chapter 11 plan by May 18, win confirmation of the plan by July 13 and exit from Chapter 11 by July 27.

Judge Robert D. Drain will consider the interim use of cash collateral and DIP, along with the joint administration of the cases, but a hearing hasn't yet been scheduled.

Under the company's previous reorganization plan, New York PE firm Ripplewood Holdings LLC made a $130 million investment in Interstate Bakeries under its reorganization plan, which included $85.8 million in convertible fourth-lien notes and gave it a 50% stake in the company. Overall, Ripplewood owns 68.56% of Hostess' equity, while Silver Point owns 12.28%.

The company exited from Chapter 11 with a $105 million first-lien exit revolving loan from GE Capital Corp. and a $360.3 million first-lien term loan from Silver Point Finance and Monarch Alternative Capital.

Prepetition lenders led by J.P. Morgan Chase Bank NA held a $137.15 million third-lien loan and $85.8 million in convertible fourth-lien notes.

According to court documents, Hostess in March issued $30 million in 10% secured convertible payment-in-kind Series C notes due 2019 to Ripplewood. In June, it received a $10 million equity investment from Ripplewood and, in late August, it received an additional $20 million in financing from certain first-lien lenders.

"Ripplewood rescued Hostess from potential liquidation after a 4-1/2 year bankruptcy process resulting in saved jobs and brands," Ripplewood spokesman Jeffrey Taufield said in an e-mail. "Ripplewood accomplished this by forming a partnership with labor that included providing the company's union employees with meaningful ownership in the business. Ripplewood continues to have confidence in Hostess' future and believes that through this re-organization process Hostess will re-emerge and be successful."

Hostess, which was founded in 1930, operates 36 bakeries, 565 distribution centers, 5,500 delivery routes and 570 bakery outlet stores throughout the U.S. Its sells brands such as Butternut, Ding Dongs, Dolly Madison, Drake's, Home Pride, Ho Hos, Hostess, Twinkies, Wonder, Merita and Nature's Pride.

The debtor has 19,000 employees, 83% of whom are members of unions covered under 372 collective bargaining agreements. The employees belong to 12 separate unions, but the majority are members of the International Brotherhood of Teamsters and the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union.

During its bankruptcy case, Hostess wants to withdraw completely from multiemployer pension plans, address the debtor's legacy health and welfare costs and modify its existing CBAs.

During its previous bankruptcy case, the debtor fought with its labor unions on new contracts.

The company also was nearly acquired out of its first bankruptcy by a joint venture of private equity firm Yucaipa Cos. LLC and Interstate Bakeries rival Bimbo Bakeries USA Inc., but the interested bidders dropped their $580 million offer in December 2007.

Hostess' largest unsecured creditors include Bakery & Confectionery Union & Industry International Pension Fund of Kensington, Md. (owed $944.16 million), Central States, Southeast and Southwest Areas Pension Plan of Rosemont, Ill. ($11.82 million), Cereal Food Processors Inc. of Mission Woods, Kan. ($8.53 million), Twin Cities Bakery Drivers Pension Fund of Eagan, Minn. ($8.36 million) and Western Conference of Teamsters Pension Plan of Seattle ($6.99 million).

The company listed its assets at $500 million to $1 billion and its liabilities at more than $1 billion in its petition.

Debtor counsel is Corinne Ball, Heather Lennox, Lisa Laukitis, Veerle Roovers and Ryan T. Routh at Jones Day. FTI Consulting Inc. is the company's financial adviser, while Perella Weinberg Partners LP is Hostess' investment banker.