Hostess committee seeks fixes to DIP facility labor and sale issues

By Caroline Salls

Pittsburgh, Jan. 31 - Hostess Brands' official committee of unsecured creditors objected to the company's proposed debtor-in-possession financing, according to a Tuesday filing with the U.S. Bankruptcy Court for the Southern District of New York.

The committee said the DIP facility provides only minimal funding, providing less than 10% of the company's alleged total pre-bankruptcy secured debt, "at an exorbitant 26% (annualized) cost."

"Two of the DIP lenders/secured term lenders collectively hold 20% of the debtors' voting equity, are likely preference defendants and were architects of the excessively leveraged capital structure that was imposed on the debtors in their last Chapter 11 and that is substantially responsible for the debtors' current bankruptcy," the committee said in the objection.

In addition, the creditor group said the DIP facility commits the company to milestones that create an unacceptably high risk of liquidation.

"To speak plainly, the future of the debtors and their creditors - including their secured creditors - turns on their ability to reach concessionary agreements with their unions and pension funds that can be ratified by the members of the local unions who retain that authority," the committee said in the objection.

"Failure to do so will, in all likelihood, result in a strike that all parties acknowledge will force a liquidation - to the detriment of all parties, secured and unsecured alike. The DIP facility's milestones court just such a result."

Specifically, the committee said the milestones require Hostess to obtain new union and pension agreements before they propose a plan, even though it must develop a plan that is acceptable to the DIP lenders by the start of contract proceedings.

The committee said the court should not approve any DIP facility unless the order adjusts the milestones to provide for simultaneous plan and labor negotiations and, to maximize the chance of a deal, terminates the period in which only Hostess can file a plan.

The committee said the company's proposed "safety net" asset sale is also flawed because it kicks in only after the labor negotiations process if there is no union deal.

"There is no chance that the debtors can sell their business as a going concern for appreciable value without a union deal," the committee said in the objection.

"Instead of approving the DIP lenders' use of the Section 363 sale as a meaningless threat, the court should reject the DIP facility unless it and its correlative order direct the debtors to commence an open-to-all bidders sale process immediately to give interested buyers the chance to offer solutions that could prevent an adversarial judgment in the Section 1113/1114 proceeding."

Hostess Brands, an Irving, Texas-based operator of regional bakeries, filed bankruptcy on Jan. 11. Its Chapter 11 case number is 12-22052.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.