Interstate Bakeries' 2004 Chapter 11 bankruptcy reorganization

Bankruptcy

In 2004, Interstate Bakeries, the maker of well-known food products such as Twinkies and Wonder Bread, filed for Chapter 11 bankruptcy reorganization. The move was necessitated by rapidly growing expenses and market share losses resulting from the company's slow reaction to America's low-carb craze (Twitty). The company still had some strong brands and the ability to make money, but its debt position would make it nearly impossible to fund the types of new products, growth initiatives and reforms needed to put the company on solid footing again (Twitty). Although Interstate had several options at its disposal to reduce debt and generate cash, ultimately Chapter 11 bankruptcy allowed Interstate to address its debt and cost problems without having to mortgage the company's future through overly deep cuts or sell-offs.

Types of bankruptcy

The biggest misconception about Chapter 11 bankruptcy is that the filing company is ceasing operations. Rather, Chapter 11 is a bankruptcy process that involves a corporate reorganization that is overseen by a court. Companies tend to file for Chapter 11 when they have an opportunity to be successful if they are able to reduce their debt and restructure their operations (Corporate bankruptcy). Several major American airlines, for example, have gone through the Chapter 11 process and emerged from bankruptcy as much healthier entities.

In a Chapter 11 bankruptcy process, the court and a company's debtors will approve a reorganization plan that, among other things, determines how much various creditors get paid (Corporate bankruptcy). There are two classes of competitors: secured and unsecured. The secured creditors, such as banks, get paid first; the unsecured creditors, such as vendors, may get only pennies on the dollar. Chapter 11 sometimes allows companies to restructure contracts, such as union deals, which was a big problem for Interstate (Twitty). At any rate, companies emerge from Chapter 11 with a much better debt and cash-flow picture.

Municipal organizations, such as cities or school districts, have a form of bankruptcy similar to Chapter 11, which is called Chapter 9 bankruptcy. Chapter 9 bankruptcy allows a municipal entity to restructure its debt and reorganize its operations, similar to Chapter 11 (Francis). Chapter 9 filings are much more rare, as municipal entities have the power to raise money at will through taxation. Chapters 12 and 13 are bankruptcy reorganizations, similar to Chapters 9 and 11, for farms and individuals, respectively (Francis).

Chapter 7 bankruptcy, in contrast to the other types of bankruptcy discussed, is completely liquidation-oriented (Francis). In the case of Chapter 7 bankruptcy, a company's assets will be sold off to pay creditors, and the company will cease to operate. A trustee will be appointed to oversee the sale.

As a private entity, Interstate essentially had a choice between Chapter 11 and Chapter 7 bankruptcy. Because the company was confident it could succeed if it restructured and achieved a level of debt relief, it elected for Chapter 11.

Conclusion

The decision to file for Chapter 11 bankruptcy reorganization was the right one for Interstate, given its debt and operational problems. The company was faced with declining market share, high costs and a great deal of debt, all of which impacted cash flow. Certainly, Interstate could sell off some assets and make drastic cuts in order to improve cash flow, and corporate management did make some of those moves. However, sell-offs and cost reductions alone were not going to allow the company to fully stabilize, and selling and cutting too aggressively made little sense. After all, Interstate still had well-known products and a strong distribution system, and those positive aspects needed to be kept in place as a foundation for the company's future.

Also, Interstate had the option of restructuring its debt, possibly extending terms, but this was an inferior option to Chapter 11, which allowed debts to be retired. By filing Chapter 11 bankruptcy, Interstate was able to get a handle on its costs, alleviate its debt, and emerge as a stronger and more stable operation.