Twinkie – An American Cake: Sweet For Some, Bitter For Others

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A group of hedge funds swooped in to “rescue” a struggling corporation—Hostess Brands—positioning it to enter bankruptcy for the second time in as many years. Will the beloved  Twinkie survive?

Silver Point Capital, L.P. is a privately-owned hedge fund sponsor based in Greenwich, CT.  Their specialties include investing in securities of distressed, large-cap, and mid-cap companies. It was founded in 2002 by two former Goldman Sachs employees.

Monarch Alternative Capital, L.P. is also privately owned and is based in New York, NY.  They specialize in investments involving debt of bankrupt and distresses companies.  It was founded in 2002.

The estimated value of Silver Point and Monarch holdings in Hostess, as of July 2012, is a market value of between $50 million and $100 million each.

Hostess entered bankruptcy in 2004, emerged in 2009, was acquired (in large part) by Monarch and Silver Point, and reentered bankruptcy in early 2012.  During negotiations lasting most of 2012, the two hedge funds were not able to reach a deal with key unions.  Without massive union concessions the fund managers saw no way to keep Hostess baking and delivering its sweet treats, so Hostess is shutting down.

Perhaps the hedge funds took on Hostess knowing they could suspend pension fund payments and attribute it to a “labor dispute,” pay themselves handsomely, and reap huge tax benefits and deductions.

Were they secure in the knowledge they could send the company into bankruptcy and shift the burden to the taxpayer? This would throw the pension obligations onto the debt-ridden Pension Benefit Guaranty Corporation (PBGC) (and hence the taxpayers) while keeping the two hedge funds near the top of the line as creditors for a share of whatever the amount was gained from liquidation (or possible full/partial sale to Sun Capital).

The PBGC is already $34 billion in the loss, and Hostess Brands is not going to be the last corporation with pension obligations that devolve to the PBGC.

What do hedge fund-driven bankruptcies mean to the financial industry and U.S.taxpayers?   Someone has to pay these obligations eventually, and if it’s not the corporation; the “vulture investors” who know they can strip assets, shirk pension obligations, and shift the burden to government agencies; or the PBGC, then all that’s left is the American taxpayer.

The nearly $1 billion in pension obligations for the unionized Confectionery Union & Industry International Pension Fund will only add to the PBGC’s woes.

What if there is not enough money in the PBGC fund?  In simple mathematical terms, the shortfall associated with Hostess Brands could be “fixed” by a tax surcharge of $5.00 for each of the approximately 220,000,000 U.S.taxpayers, but where would it end?   What about the other $34 billion the PBGC needs?  And the other member corporations heading for bankruptcy?

The end result has been the immediate loss of about 15,000 jobs and the near-term loss of the remaining 3,400 or so jobs.  Hostess is closing down, consumers are hoarding Twinkies, and the last deliveries are being made to local charities—a holiday bonus for food banks.

In the end, the All American Golden Sponge Cake with Creamy Filling has certainly been a very creamy deal for some, and a losing proposition for most.

Anna Timone (195 Posts)


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