No Cupcake: Workers Turn Down Bad Deal from Hostess [View all]

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From the CEPR:

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Hostess remained in bankruptcy for five years until it was brought out of bankruptcy in February of 2009 by Ripplewood Holdings, a private equity company. Remarkably, it exited bankruptcy with nearly $670 million in debt, almost 50 percent more than the $450 million it owed when it went into bankruptcy.

Usually companies use bankruptcy to shed debt. With Hostess the opposite was true. This meant that Ripplewood was taking a heavily leveraged gamble. If the company survived, it would get a very high return on its investment. However there was a strong likelihood that the company would not be able to make it given its extraordinary debt burden and the weakness of the economy.

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Accepting new concessions would provide no guarantee of job security. In fact, management wanted the unions to agree to the closure of 10-12 plants (of its choosing) as part of a new contract. This means that many of the company’s 18,000 workers would soon have been laid off even if the workers had accepted management’s terms.

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Third, the financial situation of the pension has to be a top concern for workers. While the pension is guaranteed by the Pension Benefit Guarantee Corporation, the guarantee for multi-employer plans like the one at Hostess is limited. If the plan were to become insolvent then many workers would see large cuts in benefits.

From this standpoint, if Hostess were to continue to put off contributions to the pension and allow it to become badly underfunded, then workers could be looking at sharply reduced pensions in retirement. Workers who are approaching retirement age may view this prospect as a far greater danger than the risk of losing their job at this stage in their career.

Read more: http://www.cepr.net/index.php/blogs/cepr-blog/no-cupcake-workers-turn-down-bad-deal-from-hostess

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