Judge Robert D. Drain of the U.S. Bankruptcy Court for the Southern District of New York in White Plains made a lengthy oral ruling Monday, May 14, denying the company's request to terminate its collective bargaining agreements with the labor union, a source familiar with the case, who asked not to be named said.

A written ruling is expected this week, the source said.

According to a Hostess spokesman, "Hostess had planned to continue negotiating in good faith regardless of [Monday's] outcome and we will also consider the judge's invitation to submit a revised proposal if need be."

"It's always been Hostess' goal to try to reach a consensual agreement," the spokesman said.

"We told our Hostess members all along that we would vigorously oppose the imposition of unjust working conditions since Hostess first filed for bankruptcy and we have done just that," IBT's general secretary and treasurer Ken Hall said in a Tuesday statement. "It's a rare day when a bankruptcy judge denies a company's request to reject its union contracts, and I attribute it to the resolve of our members and the team we assembled to fight the company's [Section] 1113 motion."

Hostess had asked to withdraw completely from its multiemployer pension plans -- collectively bargained and covering more than one employer -- address its legacy health and welfare costs and modify its existing collective bargaining agreements.

During the judge's decision, he agreed that Hostess' multiemployer pension plans were a big risk and would scare off investors, the source said.

According to the source, Hostess is looking to increase its Ebitda margin by roughly 10% in its business plan, and the IBT is looking to increase the Ebitda margin by roughly 9% in the plan that it proposed, so the judge told the parties to go back and try to get a deal done.

The judge strongly suggested that the two parties try to reach a consensual agreement, the source said.

The Irving, Texas, debtor has 19,000 employees, 83% of whom are members of unions covered under 372 collective bargaining agreements. The employees belong to 12 separate unions, but the majority are members of the IBT and the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union.

According to a Hostess fact sheet for union employees, "Hostess has an unsustainable and uncompetitive cost structure. Our costs are higher than [those of] our competition, and because they are too high we lose money. Our labor costs, our infrastructure costs, our corporate overhead and our past acquisition legacy costs are too high."

"We remain committed to finding a solution and urge the company and its lenders to do the same," the IBT said in its statement.

Hostess' trip through bankruptcy is its second in the past decade.

The company first filed for Chapter 11 as Interstate Bakeries Corp. on Sept. 22, 2004, in the U.S. Bankruptcy Court for the Western District of Missouri in Kansas City. The debtor exited from bankruptcy protection on Feb. 3, 2009.

Hostess filed for bankruptcy protection again to affect the "fundamental operational and financial changes that the debtors' businesses require in light of their declining performance, aging infrastructure, strained liquidity levels and excessive debt, and the significant challenges facing the debtors, including, but not limited to, uncompetitive and unsustainable labor and legacy costs and an intensified competitive environment," former CEO Brian J. Driscoll said in a declaration filed with the court Jan. 11.

Since its 2009 exit from Chapter 11, the debtor's financial performance hasn't kept pace with the projections set forth in its reorganization plan. The company had a net loss of $138 million in fiscal 2010, and in fiscal 2011, ended May 28, 2011, the company lost $341 million, court documents said.

Hostess blamed its economic trouble on high legacy costs such as pension and medical benefits, inflexible labor work rules and structures, and unsustainable debt levels.

The debtor owes $860 million in prepetition secured debt in four tranches.

Under the company's previous reorganization plan, New York private equity firm Ripplewood Holdings LLC made a $130 million investment in Interstate Bakeries, which included $85.8 million in convertible fourth-lien notes, and gave it a 50% stake in the company. Overall, Ripplewood owns 68.56% of Hostess's equity, while Silver Point Finance owns 12.28%.

The company exited from Chapter 11 with a $105 million first-lien exit revolving loan from GE Capital Corp. and a $360.3 million first-lien term loan from Silver Point Capital and Monarch Alternative Capital.

Prepetition lenders led by J.P. Morgan Chase Bank NA held a $137.15 million third-lien loan and $85.8 million in convertible fourth-lien notes.

According to court documents, in March 2011 Hostess issued $30 million in 10% secured convertible payment-in-kind Series C notes due 2019 to Ripplewood. In June, it received a $10 million equity investment from Ripplewood, and in late August, it received an additional $20 million in financing from certain first-lien lenders.

Hostess, which was founded in 1930, operates 36 bakeries, 565 distribution centers, 5,500 delivery routes and 570 bakery outlet stores throughout the U.S. Its brands include Butternut, Ding Dongs, Dolly Madison, Drake's, Home Pride, Hohos, Hostess, Twinkies, Wonder, Merita and Nature's Pride.

Corinne Ball, Heather Lennox, Lisa Laukitis, Steven Bennett, Todd S. Swatsler and Robert W. Hamilton at Jones Day are debtor counsel.

FTI Consulting Inc. is the company's financial adviser, while Perella Weinberg Partners LP is Hostess's investment banker.

Thomas Moers Mayer, Philip Bentley and P. Bradley O'Neill at Kramer Levin Naftalis & Frankel LLP represent the official committee of unsecured creditors. Blackstone Advisory Partners LP is financial adviser for the committee.