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Hostess Prepares to Liquidate, Taxpayers Await Bill

Tickers in this article: CAG FLO

Updated to reflect approval of Hostess Brands liquidation

NEW YORK ( TheStreet) - Late on Wednesday afternoon a New York court approved Hostess Brands plan to wind down operations after 82-year old snacks maker was unable to reach a new labor agreement with its unionized workers that could have staved off the company's liquidation, initially filed on Friday.

After a court mandated mediation between Hostess and the Bakery, Confectionery, Tobacco Workers and Grain Millers Union fell through late on Tuesday, a Wednesday ruling by Judge Robert D. Drain of the Southern District of New York returns the company to a 'liquidation scenario,' which will put the company's assets up for sale and cost 15,000 workers their job on the eve of Thanksgiving.

The wind down may also put millions of dollars in pension obligations on the government's books.

While job losses and plant closings are the worst part of Hostess Brands demise - company CEO Gregory Rayburn said in court 15,000 workers will be fired today and a further 3,200 workers will be retained to maintain plant as asset sales loom -- the company's failure may raise new questions as to whether private equity investors are using bankruptcy courts to extract investments at the expense of taxpayers.

When Hostess filed its liquidation plan the company also said it would terminate its single and multi-employer pension plans.

Judge Drain's approval of Hostess's liquidation on Wednesday means thousands of employee pension plans are going to fall into the hands of the Pension Benefit Guaranty Corporation , a struggling federal agency that said on Friday its financial woes may force it to draw taxpayer support.

As part of Hostess Brands liquidation filing, the company said it would terminate its pension, with roughly 2,300 employees in the company's single-employer plan falling under PBGC's guaranty, according to an agency statement. The company's larger multi-employer plan may also get some PBGC support, while potentially not needing a full guarantee because losses could be mutualized.

On Monday, TheStreet detailed how private equity investors may be using the PBGC's pension guarantees to recover on losing investments or create for bargain basement buys .

Hostess' liquidation -- just like the recent bankruptcies of well known companies like Friendly's Ice Cream and Eddie Bauer -- raises the prospect that sophisticated private equity and distressed debt hedge fund investors are using courts to cast off unwanted pensions on U.S. taxpayers and put a losing investment back on the track.

Consider that subsequent with Hostess's liquidation plans, the Pension Benefit Guaranty Corporation disclosed on Friday that its pension plan insurance deficit grew to a record $34 billion this year, the biggest shortfall in the federal agency's history. PBGC guarantees employee pension plans after a company goes belly up, securing the retirement of roughly 43 million U.S. workers.

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