Hostess sees wind down spanning 12 months

by World Grain Staff
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IRVING, TEXAS, U.S. — Hostess Brands, Inc., which said on Nov. 16 that it has suspended operations at all of its bakeries, hopes to complete the wind down and sale of its assets in approximately one year, according to a Nov. 16 filing with the U.S. Bankruptcy Court for the Southern District of New York.
The filing says the “desired outcome” of the wind down would be to sell groups of assets that could then be operated as an ongoing concern. Doing so would result in the buyer assuming as many of the related administrative expenses and other claims as possible.
Plans already have been put in place by Hostess for 13 “wind-down periods,” which would span the entire one-year projected duration of the wind down, but operational and other cost projections only have been finalized for the first 13 weeks, the company sasaidys.
“The debtors have begun to implement certain critical preliminary aspects of their wind-down plan on an emergency basis to maintain and preserve the value of their assets and Chapter 11 estates, but desire to limit the actions that they must take prior to obtaining Court approval,” the filing said. “Because of the costs that accrue from continuing to lease real and personal property, because of the perishable nature of many of the ingredients and finished goods of the debtors, obtaining the relief requested as quickly as possible will limit costs and speed the wind-down process. This will help ensure that the debtors remain in continued compliance with health and safety regulations that are applicable to the debtors’ bakery business.”
The filing acknowledges that liquidation is only allowed if “sound business justifications” are demonstrated. The strike has offered this justification, the company says.
“The debtors have suffered significantly due to labor unrest in the past week,” Hostess said. “Since the strikes were commenced on Nov. 9, the debtors estimate that, by Nov. 19, they will have incurred between $7.5 million-$9.5 million in losses in the aggregate, due to lost sales and increased costs of production. These losses and other factors, including increased vendor payment terms contraction, have resulted in a significant weakening of the debtors' cash position and, if continued, would soon result in the debtors completely running out of cash.”
The filing emphasizes that Hostess has taken a “hope for the best, expect the worst” attitude in anticipation of the need to liquidate. The wind-down plan is “the culmination of months of planning and analysis, developed using a comprehensive analysis of each of the debtors’ major operating segments and separate cost and timing assumptions for the wind down of the debtors’ plants, depots, retail stores and corporate functions,” Hostess said.
Such planning was necessary, the filing emphasized.
“As is evident from the wind-down plan, the cessation of the debtors’ operations is not a simple matter of turning off the lights and shutting the doors: baked goods and inventory must be sold or disposed of; production equipment must be properly cleaned, packed and prepared to preserve its value; owned and leased assets must be collected from across the nation and transferred to owned locations; and the debtors’ hundreds of plants, depots and retail stores must be staffed, cleaned and secured in advance of return or disposition.”
If not handled in an orderly fashion, a “free fall shutdown and fire sale liquidation would among other things, irreparably damage production equipment, could result in the failure to dispose, or improper disposal, of waste materials and could force the debtors to incur significant additional administrative expenses.”
Hostess said it has organized its wind-down plan around four major categories of its business: bakery assets; depots; retail and thrift store outlets; and corporate functions.
Hostess currently owns 37 plants across the U.S., of which 36 are operational. As part of the wind-down plan, each plant will maintain a dedicated team to prepare, preserve, secure and clean the real estate, the facility and the various assets located at the facility for sale. During the first four weeks of the wind-down, Hostess says it expects to keep 28 employees in place at each plant. By the end of the third, four-week wind-down period, only one employee is expected to remain on site.
All excess raw material ingredients located at the plants, such as flour, sugar and corn starch, have been or will be refused, returned to suppliers or sold to third parties, Hostess said. The company estimated the amount of excess ingredients on hand at $29.3 million, with an additional $1 million in generic packaging materials on hand.
Total costs associated with the wind down and disposition of each of the plants and their related assets are anticipated to total about $17.58 million over the first 13 weeks of the wind down, the company said.
Hostess currently owns 165 depots and leases another 388 facilities. Primary wind-down activities to be undertaken at the depots include cleaning and preparation of sites for return or sale. Equipment and vehicles owned or leased by Hostess that are located at the depots will be aggregated, secured and transferred to owned locations prior to the rejection of any underlying depot lease, the company says. Any remaining baked goods at the depots will be sold to third-party retailers, sold at Hostess retail stores, donated or destroyed, the company says.
By the beginning of the wind down Hostess says it expects it will need 826 employees at the depots, with the number rapidly declining to zero by the end of the seventh week of the wind down.
Overall costs associated with the wind down and disposition of each of the depots and their related assets are expected to total about $6.85 million over the first 13 weeks of the wind down.
Hostess owns 48 stand-alone retail stores, leases an additional 168 such stores, owns 113 hybrid depot/retail stores and leases 198 hybrid depot/retail stores. The primary wind-down activities to be taken at the retail stores include facility cleaning and the sale and disposition of finished products. As part of the wind down, Hostess says the perishable baked goods inventory rapidly will be either sold to customers through going-out-of-business sales, abandoned and donated to charity or destroyed, or grouped together and transferred to owned retail stores.
The wind down of the retail stores and going-out-of business sales are expected to occur on an expedited basis and be completed in approximately four weeks after the beginning of the wind down. The plan will require a total of 1,076 remaining employees, including 22 retail sales senior managers, retail sales managers and district sales managers to oversee the wind-down of the retail stores. The headcount will drop to zero by the fifth week of the wind down.
Costs associated with the wind down and disposition of each of the retail stores and their related assets are expected to total $8.76 million over the first 13 weeks of the wind-down.
Calling it “one of the more critical challenges that the wind-down plan addresses,” is how Hostess will simultaneously wind down its various corporate functions while ensuring the ability to complete tasks that are necessary for the Chapter 11 process. Hostess says it will need about 237 employees at the corporate level to implement the wind-down of information technology, human resources, legal and financial affairs.
Of the 237 employees, 131 are expected to be financial and accounting personnel.
“The need to retain such a large number of financial personnel is the direct result of the debtors’ centralized accounting system, which necessitates that field accounting personnel facilitate the collection of, and accounting for, remaining accounts receivable across 18 field locations,” Hostess said.
The remaining employees also will include 19 senior management employees, who will be offered incentive payments as motivation and encouragement to take on additional job responsibilities as part of the wind down.
Costs associated with the wind down of the corporate functions are expected to total about $8.1 million over the first 13 weeks of the wind down.
Hostess said it plans to fund the wind down and pay for other administrative costs with borrowings under the DIP Credit Agreement, the consensual use of the cash collateral of the DIP Lenders and the First Lien Term Loan Lenders and the non-consensual use of the cash collateral of the ABL Lenders. The financing will be supplemented with proceeds gained from the liquidation of assets, the company added.
The need to retain certain non-senior managers to effect the wind-down plan is emphasized in the filing. While this aspect also featured in the earlier bankruptcy plans, it is heightened in the liquidation scenario because of the “absence of any expectation of long-term employment with the debtors,” the filing said.
“The success of the wind-down plan will also depend on the debtors’ ability to incentivize senior management employees who will need to take on additional job responsibilities to ensure timely completion and achievement of certain tasks and goals associated with the wind-down plan,” the filing said. “Such tasks and goals are complex and challenging.”
Based on this need, the company is proposing a one-time retention payment of 25% of wage compensation for non-senior management from the date of the filing until their work is completed. The company estimated the cost of the retention plan at $4.4 million.
To incentivize senior management, Hostess proposes a one-time payment of 25% to 75% of base compensation. Between 75% and 85% of this amount will be based “on the successful completion of various metrics for that employee’s group.” The high end of the cost for this plan is expected to be $1.75 million, the filing says.
The company notes the plan will replace, and not be in addition to, prepetition bonus and severance plans. They further note that the average payment for non-senior management employees under the retention plan is “below the market average” versus similar recent cases.
For senior management, the metrics that will trigger the payments “have been designed to reward the senior management employees only if they achieve positive results that will benefit creditors,” the company said. “These metrics will not be easy to achieve.”
Detailing the planned process of selling excess ingredients and excess packaging, Hostess says few of the ingredients are highly perishable but many have a “relatively limited shelf life.”
Because the original suppliers of the ingredients “know their quality and remaining shelf life,” Hostess will try to return the ingredients to them.
“Also, in most instances, the original suppliers of excess ingredients and excess packaging have a preexisting transportation system that can be used to effectuate the return of such materials without the need for the debtors to engage third-party logistics and transport services,” Hostess said. “The debtors anticipate that the return of raw materials to the original suppliers will result in a partial to full refund of the original purchase price for such materials and/or a reduction or elimination of any valid administrative expense claims of such suppliers.”
When selling ingredient and packaging to original suppliers does not work out, Hostess is seeking to use third party liquidators, the filing says, noting Hostess is “not in the business of selling such raw materials.”



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