This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.
After encountering financial difficulties, Hostess, the company that makes wonder bread and Twinkies, decided to file for bankruptcy. The specific type of bankruptcy that Hostess filed for is chapter 11. Other than chapter 11, there are four other chapters that are available but Hostess, like all corporations, it does not qualify for them. The other chapters are chapter 7, chapter 9, chapter, 12, and chapter 13. The distinguishing feature between these chapters is the entity that gets protected. Chapter 11 which Hostess qualified for is available to both corporations and individuals, but it is mostly used by corporations. This chapter allows a company to pay back its debts through a repayment plan without losing the assets it needs to keep functioning. Corporations file for chapter 11 upon the realization that there is limited ability to repay creditors. According to Mark Lennihan of USA Today, Hostess owes Bakery & Confectionary Union & Industry International Pension Fund $944.2 million.
Chapter 11 lets the owners of the company retain leadership with court oversight as they restructure and reorganize the company. If the creditors are unpaid after an agreed period of time, the company shifts ownership to the creditors as the debtors are left out. This is different from chapter seven that results in selling of assets and distribution of proceeds to creditors. Chapter 9 is used by municipalities while chapter 12 and 13 are used by families. They allow the debtors to repay what is owed through a plan decided upon by the court with consultation with the creditors. Chapters 12 and 13 allow the debtors to keep things like a car of a home whereas under chapter 11, if the creditors are eventually not paid, they take the entire corporation leaving the original owners who are the debtors without anything as far as the company is concerned.
By the time Hostess was filing for chapter 11, it was in serious debt. The amount of money the company owes Bakery & Confectionary Union & Industry International Pension Fund is $ 944.2 million. The company has liabilities amounting to $1 billion (Lennihan, 2012). The assets’ value ranges between $500 million and $ 1 billion (Lennihan, 2012). Already, the liabilities are more than the assets. That means the company has become insolvent. This level of debt is serious enough for any business entity to take make a clear assessment of its operations so as to find how to deal with it. Hostess did the assessment and settled for chapter 11.
Even though Hostess decided to settle for chapter 11, there are other avenues that would have been used to try and raise money to reorganize the company and try to bring it back to profitability (Swanson et al., 2008). One of them is asset-based financing. Under asset-based financing, Hostess would have approached a potential creditor and given account receivables to the lender while securing operational capital in return. The lender would have used the cash inflow as loan repayment (Business Owners’ Toolkit, 2012). Hostess would have also utilized trade credit. In this case, the Hostess management would have talked to suppliers to continue supplying all the materials needed on credit while carefully reorganizing the company to achieve profitability and then pay the suppliers. The other way it would have handled its financial issues is by renting machines and equipment instead of purchasing them so as to cut down its expenditure until such a time that profitability is high enough to make direct purchases and meet other financial obligations such as repaying its loans like the one it owes Bakery & Confectionary Union & Industry International Pension Fund. Therefore, it is justifiable to argue that chapter 11 is not the only option that Hostess had in its bid to solve its financial troubles. However, chapter 11 provides the company with the ample time to reduce its borrowing during the reorganization period. The next part is to examine why debt financing was not a viable option for Hostess, resulting in its decision to file for chapter 11.
Why Debt Financing was unviable
One major reason why debt financing was unviable for Hostess is its extreme financial trouble. In order to secure banks or other financial institutions willing to purchase a debt, several factors are considered. They include the asset value of the borrower, the amount owed to other creditors, and the possibility of near-future profitability or recovery from current financial trouble. The Hostess situation in terms of debt is such that it already owes other creditors colossal sums of money. Therefore, any lender contemplating lending will be turned off by the huge debt with the argument that repayment will be extended to the existing creditor first, thus extending the repayment period for new creditors. Debt financing for Hostess was also a difficult choice due to the low value of its assets compared to liabilities. The situation was also not helped by the fact that the market for Hostess’ products is shrinking as people shift to whole foods, and competitors with these healthy choices have flooded the market (Choi & Murphy, 2012). This situation has the potential of warning would-be lenders that the borrower will not have the market to sell its products and repay the loan.
It is important to note that even other options such as renting of machinery and equipment and the idea of trade credit where suppliers are persuaded into supplying items on credit with the promise of future payment have their limits, and Hostess might have considered them and found them unviable. Suppliers can only agree to supply on credit when they are able to see the possibility of profitability by the company. A careful look at Hostess and its market provides a picture that might make suppliers see profitability as a distant mirage. For example if suppliers of wheat can supply wheat to Hostess and then it continues to produce the same bred that Americans are increasingly abandoning, chances of that supplier being paid are low compared to when the market is vibrant. Hostess will only be able to secure this type of facility after a thorough reorganization of its operations that will get rid or reduce the production of items that are no longer poplar and the inclusion of popular products, followed by a thorough marketing campaign to inform the market of its new products. The market is also tougher given the presence of both large and small competitors who already sell some of the products that Hostess might want to shift to.
Business Owners’ Toolkit (2012). Debt Financing. Retrieved February 26, 2015 from http://csi.toolkit.tst.cch.com/text/P10_3000.asp
Choi, C. & Murphy, T. (2012) Twinkie Maker Hostess Reaches the End of the Line. (November 16) Retrieved June 20, 2013 from http://bigstory.ap.org/article/hostess-close-cites-nationwide-worker-strike
Lennihan, M (2012). Maker of Twinkies, Wonder Bread files for bankruptcy. USA Today, 1/11/2012. Retrieved February 26, 2015 from http://usatoday30.usatoday.com/money/industries/food/story/2012-01-11/hostess-bankruptcy-twinkies-wonder-bread/52495162/1
Swanson , J et al. (2008), A Practitioner's Guide to Corporate Restructuring. New York: City & Financial Publishing, 1st edition