Twinkies Return

Twinkie enthusiasts mourned last November when the iconic snack left shelves, following the Chapter 7 liquidation of Hostess Brands after eighty-two years in operation. Many took to social media to wax nostalgic and bemoan the loss of the fabled vanilla-cream-filled sponge cake, a staple of American snacking indulgence since the Great Depression. The rest raced out to grab the last remaining inventories in big-box and convenience stores – after all, Twinkies were portrayed in Die Hard and Zombieland as resilient enough to last one thousand years and sustain humanity despite a zombie infestation, respectively.

What brought Hostess Brands to the point of liquidation? As noted in the Wall Street Journal, the company’s far-flung manufacturing operations included 11 factories, each of which was operating at about half-capacity; meanwhile, its thousands of drivers traveled directly to each individual convenience store to make deliveries. Hostess also had around $1.3 billion in debt to service, along with a high proportionate union wage and pension benefit expense relative to competitors. While the American consumer became more health-conscious over time, the Twinkies recipe – complete with goodies like high fructose corn syrup, partially hydrogenated oils, polysorbate 60, and yellow #5 – held constant for decades. All this led to a grim November, as factories closed their doors, workers lost their jobs, and the famous golden snack disappeared from shelves across the country.

None of the employees under the new organizational structure will have union representation, greatly altering the compensation and pension expense picture. And CEO Dean Metropoulos has even hinted at experiments with gluten-free, whole grain, or stevia-sweetened alternative snacks. While it’s too soon to tell if the $410 million paid to purchase Hostess Brands will be an effective investment, 441 thousand Facebook fans (at last count) couldn’t wait for stores to open at midnight today.

But the Twinkie isn’t the only thing trying to make a sweet comeback these days. LIBOR, the reference rate on hundreds of trillions of dollars in loans and swaps, spent last year going through its own public demolition, after it came out that as many as twenty large banks were named in lawsuits or investigations of rate rigging. Acting within this alleged cartel, some banks acted duplicitously to misstate LIBOR fixings (lower or higher) in order to make unmerited profits on specific trades, and at other times (only lower) to misrepresent their true borrowing costs during the credit crisis. The pending litigation over inaccurate LIBOR quotes could cost the industry tens of billions, which led one bank CEO to refer to this in The Economist as “the banking industry’s tobacco moment.”

The very future of LIBOR itself became so uncertain that the British government asked Martin Wheatley, then managing director of the Financial Services Authority, to investigate its prospects. Wheatley found that LIBOR was “broken and need[ed] a complete overhaul,” but called for comprehensive reform rather than completely scuttling the benchmark rate. The Wheatley Report noted “no noticeable decline” in LIBOR’s usage, and recommended several key solutions to return credibility to the LIBOR indices. A new administrator would need to take responsibility for LIBOR, ensuring transparency and fair access to the benchmark rate. LIBOR submitters would need to follow a specific code of conduct, commit to transaction record keeping and subsequent publication, and submit to a regular audit. And for any currencies and tenors with insufficient trade data, LIBOR would cease to compile and publish rates.

Then came the news last Tuesday that NYSE Euronext was buying LIBOR for the paltry sum of £1, even though the Wall Street Journal reports that the index generates about £2 million in revenue per year. Now that an independent company runs the benchmark, rather than a group of banks, the clear conflict between accurate rate-setting and bank profiteering will presumably be obviated. Additionally, as the owner of LIBOR, NYSE Euronext will have reasons to make the rate-setting process as credible as possible to prevent competitive entrants. They won’t be changing the name anytime soon, or even the formula for calculation, but intend to adapt the formula over time in accord with the Wheatley report’s recommendations. This may spell a resurgent LIBOR, even if existing loans continue to work under the old benchmark compilation rules while new financings adopt new compilation rules. But only time will tell if for all who love the LIBOR benchmark, July 9, 2013 stands out as the beginning of one of the sweetest comebacks in the history of ever.

Beyond LIBOR reform, there’s so much going on in the markets these days – check out our Market Update Webinar as we discuss the state of the economy, the latest comments from the Fed, key financial data, fixed versus floating-rate debt, and recent regulatory changes. And feel free to bring your own Twinkies!

Tags: LIBOR, loans, Swaps