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Friday, May 23, 2014

Multiemployer Pension Plans, Bankruptcy and Twinkies


I've been meaning to do some research on multiemployer pension plans and how they are treated in bankruptcies, mainly because as an investor, it is difficult to value a company that participates in one of these plans. In this post, I will give a background of multiemployer pension plans, their challenges, and proposed reforms. In the next post, I will discuss liability disclosures and valuation of companies from an investment standpoint. Hostess is a good case study for this topic because we see the impact of a bankruptcy on other employers that contribute to the multiemployer pensions. 

When Hostess filed for bankruptcy in 2012, the world was aghast at the possibility losing the "golden sponge cake with creamy filling" called the Twinkie. The filing came just a few years after completing a an earlier restructuring and purchase by Ripplewood Holdings. The pastry maker cited pension and medical benefits obligations for its financial downfall. At the time, Hostess employed 18,500 employees, 83% of which were were union members. Bloomberg

Then, Apollo and Metropoulos used their resurrection stone to bring back the famed confectioner from the dead. The private equity firms won against a crowded bidding pool to acquire certain assets of Hostess in a 363 asset sale for $410 million in cash (Apollo Press Release). But even as the carb-laden sweets came back, many of the jobs did not. 

"Hostess had two main unions when it went under: About 6,600 employees were members of a bakers' union and worked at 33 bakeries nationwide, and 7,500 were drivers who belonged to the Teamsters union.

Some of the reduction in jobs is due to the new owners' different business model. Instead of using truck drivers as salesmen to deliver the product and stock the shelves of about 50,000 stores, the new company will hire outside trucking firms to deliver trailers full of the product to retail distribution centers.

Some jobs won't be coming back due to the permanent shutting of nearly 600 outlet stores the old Hostess Brands operated to sell products directly to consumers."  CNN Money

The Chapter 11 filing of Hostess had another unfortunate impact: multiemployer pension funds in which Hostess was involved. Here's a little more background on multiemployer pension plans: 

"Multiemployer plans are collectively-bargained pension plans that are maintained by two or more employers. In a multiemployer plan, there is joint and several financial liability between all employers in the plan." (US Chamber of Commerce)

"When Hostess Brands Inc. went bankrupt in 2012, it triggered anxiety among employees at Ottenberg’s Bakery, a family-owned enterprise in Maryland. The companies shared a pension plan, and if Hostess couldn't pay its retirees, Ottenberg’s would have to pick up the tab." Bloomberg

Afraid of a domino affect (and probably the wrath of the Teamsters), the Pension Benefit Guaranty Corporation (PBGC) paid for the retirement benefits of 350 former Hostess Brands employees who were members of the Bakery and Sales Drivers Local 33 Industry Pension Fund. The remaining people covered under the Bakery and Sales Fund will be merged with another plan to protect benefits of workers in multiemployer funds. 

While this can be reminiscent of Chrysler, the important distinction is that this specific funding for the retirees isn't coming from Hostess lenders; it's coming from the PBGC which charges premiums for these kinds of guarantees. 

But it's not as if bankruptcy didn't play a role in the fate of the multiemployer plan. When a company decides to either completely or partially withdraw from a multiemployer plan, it faces withdrawal liabilities that are considered debt. (Fox Rothschild).  

"The Bankruptcy Code is wreaking havoc on multiemployer pension plans by providing an escape hatch from employer withdrawal liability, as recently highlighted by In re Hostess Brands, Inc. By taking advantage of bankruptcy courts, employers are able to discharge their Early Withdrawal Liabilities (EWL) as a debt and as a result avoid paying millions or even billions of dollars in EWL to pension plans." Villanova Law Review.

And importantly, from a debt-holder's perspective, the withdrawal liabilities are considered pari to unsecured debt. According to Marketwatch, Hostess' unsecured debt will recover between 12-42%, surely impacted by multiemployer plan claims, while bank loans will recover 27-80%. 

And then, there's the PBGC, which is also in perilous shape. Here's what The New York Times Dealbook  has to say: 

"The P.B.G.C. is supposed to be self-supporting, financing its operations with premiums paid by companies rather than tax dollars. Its single-employer program has the power to take over company pension funds before they run out of money so the assets can be used to help defray the costs. But the multiemployer program must wait until a failing plan’s investments are exhausted, so it gets nothing but bills. It now has premiums of about $110 million a year to work with. All it would take is the failure of one big plan to wipe out the whole program."

Institutional Investor also has a report on management of multiemployer funds and the Teamsters' role in pension plans. 

There's a lot of interest in overhauling the way multiemployer plans and their withdrawal liabilities work. Recently, the National Coordinating Committee for Multiemployer Plans issued a report called "Solutions not Bailouts". The reform outlined in this plan address offers remedies such as limiting withdrawal liabilities and providing the trustees with the flexibility of reducing benefits for deeply troubled plans. 

Given the all-time highs of the stock market, the underlying assets in the multiemployer funds are probably helping many of the funds to stay afloat. Hopefully, we'll have a change in the current multiemployer benefit system before stocks turn south, taking valuation of many of the funds in the same direction. 

In the meantime, it is important to think critically about investments in industries such as construction, entertainment, manufacturing, mining and transportation, which utilize the multiemployer pension plans, since their pension liabilities could be greater than expected. In my next post, I will take a closer look at assessing pension liability disclosures to help make investment decisions. 

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