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Hostess Prepares to Liquidate, Taxpayers Await Bill

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On Tuesday night, Hostess Brands said it was unable to reach a new labor agreement with its unionized workers, which could have staved off the company's Friday filing for a liquidation.

After a court mandated mediation between Hostess and the Bakery, Confectionery, Tobacco Workers and Grain Millers Union fell through late on Tuesday, the company will face an 11 a.m. hearing in a New York court to follow through on the company's liquidation plan, which may cost roughly 18,500 workers their job and may soon put millions of dollars in pension obligations on the government's books.

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While job losses and plant closings are the worst part of Hostess Brands demise, the company's failure may raise new questions as to whether private equity investors are using bankruptcy courts to extract investments at the expense of taxpayers.

When Hostess filed its liquidation plan, the company also said it would terminate its single and multi-employer pension plans.

Were a bankruptcy judge to approve Hostess's plans on Wednesday, thousands of employee pension plans are going to fall into the hands of the Pension Benefit Guaranty Corporation, a struggling federal agency that said on Friday its financial woes may force it to draw taxpayer support.

As part of Hostess Brands Friday liquidation filing, the company said it would terminate its pension, with roughly 2,300 employees in the company's single-employer plan falling under PBGC's guaranty, according to an agency statement. The company's larger multi-employer plan may also get some PBGC support, while potentially not needing a full guarantee because losses could be mutualized.

On Monday, TheStreet detailed how private equity investors may be using the PBGC's pension guarantees to recover on losing investments or create for bargain basement buys.

Hostess' liquidation -- just like the recent bankruptcies of well-known companies like Friendly Ice Cream and Eddie Bauer -- raises the prospect that sophisticated private equity and distressed debt hedge fund investors are using courts to cast off unwanted pensions on US taxpayers and put a losing investment back on the track.

Consider that subsequent to Hostess's Friday liquidation plans, the Pension Benefit Guaranty Corporation disclosed that its US pension plan insurance deficit grew to a record $34 billion this year, the biggest shortfall in the federal agency's history. PBGC guarantees employee pension plans after a company goes belly up, securing the retirement of roughly 43 million US workers.

While PBGC doesn't take government money directly -- it's funded by way of insurance premiums and portfolio returns -- the agency's head said on Friday that a growing deficit raises the prospect of taxpayer support.

In a statement released with the agency's bleak outlook, PBGC Director Joshua Gotbaum attributed the plan's shortfall on an inability to set premiums for member companies and noted that the agency's deficit may put taxpayers at risk for the first time in its 38-year history.

"PBGC may face for the first time the need for taxpayer funds," Gotbaum said on Friday.

As taxpayers brace for a prospective bailout of PBGC -- which may soon include Hostess Brands a $50 million single employer plan shortfall -- scores of private equity investors and corporations are lining up to pick over the assets of Hostess, the maker of consumer fattening favorites such as Ho Hos and Twinkies.

A Monday report from Fortune Magazine indicates private equity firm Sun Capital might bid on Hostess Brands as a going concern. However, the report doesn't specify how pension obligations would be dealt with following the Friday termination of employee plans.

Also on Monday, Flowers Foods (NYSE:FLO) increased its line of credit, in a move analysts speculated might pave the way for a bid on some Hostess assets. Pabst Blue Ribbon owner C. Dean Metropoulos& Co. is also rumored to be an interested party, among scores of prospective reported bidders for Hostess or its individual brands that includes ConAgra Foods (NYSE:CAG) and Mexico's Grupo Bimbo.

Sun Capital's interest in Hostess may very well underscore how private equity firms use PBGC guarantees to pave the way for profitable investments. In January, the Center for Economic Policy Research detailed how Sun Capital used Friendly's Ice Cream's 2011 bankruptcy to wipe 6,000 employee pensions from the company's books. In that deal, the PBGC accused the buyout firm of fraud.

After filing for bankruptcy in January, Hostess tried to renegotiate pay and benefit packages with the company's unionized workers, which included near double digit salary cuts, a multi-year suspension of pension plan payments and a big cut in funding for employee health plans. In response to the deal, Hostess's bakery workers union went on strike to protest the cuts earlier in November, and the company said it would close operations for good if a deal was not reached expediently.

While Hostess broke ground with the Teamsters, it was unable to reach a deal with the bakery union, even after Tuesday's mediation. In trying to negotiate a deal, the private equity-owned company took widespread criticism for mismanagement, executive bonuses, high debt levels, and unfair practices tied to pension plan funding from the Teamsters and bakery workers.

In Hostess Brands' January 2012 bankruptcy filing, the company's biggest unsecured creditor was The Confectionery Union& Industry International Pension Fund, a unionized employee plan with a near $944 million pension claim.

Further down the list of financial losers in Hostess Brands bankruptcy and potential dissolution are the company's hedge fund investors, which include Monarch Alternative Capital, Ripplewood Holdings, and Silver Point Capital.

The size of the near $1 billion union pension claim is likely, in part, because Hostess's hedge fund owners stopped contributing to the company's pension plan in August 2011, as a result of bitter labor negotiations and deteriorating finances.

It remains to be seen how Hostess Brands liquidation plans play out, but taxpayers should be wary that the company's pension liabilities fall on their books as private equity investors circle the company for an investment.

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