KANSAS CITY, Mo. (HedgeWorld.com)–Interstate Bakeries Corp., a company that filed for Chapter 11 protection from its creditors Sept. 22, is receiving unusual attention from hedge funds–unusual in that, although “vulture funds” often buy the secured or priority instruments of bankrupt firms, these funds are making the more speculative move of buying IBC’s common stock.

IBC, which is best known for Wonder Bread and the Hostess line of sweet goods, has attributed its financial difficulties to a high fixed costs structure, increased costs for employee health care and pensions and for product ingredients such as wheat flour and for energy and on other woes as well. Some observers say that IBC has been too slow to adjust to Americans’ fixation with diet and carbohydrates especially.

This past spring, a food industry analyst at Prudential Equity Group LLC, John M. McMillin, wrote optimistically that he was not eager to rate this stock “underweight,” (i.e. to predict that the stock’s total return would be less than the average total return of other stocks in the industry) because most of the bad news about the company was already out, because IBC was about to free up some cash through plant closings and because “Atkins could be a fad that abates quickly.”

IBC had no such luck. Its stock was just above US$7 a share before an Aug. 30 announcement that it was delaying its 2004 10K filing with the Securities and Exchange Commission. The price fell to around US$5 immediately, sinking more slowly in the following weeks as the extent of its troubles became more widely known, then dropping to US$2.05 on Sept. 22, the day it filed in the U.S. bankruptcy court, Western District, Missouri.

The first hedge fund group to show confidence in its continued viability was that managed by QVT Financial LP, New York, which purchased 7.27% of the common stock in three blocks, on Sept. 24, 27 and 28. One of QVT’s funds is QVT Fund LP, Grand Cayman Island.

Gruss Asset Management LP, New York, which also manages a Cayman Islands fund (Gruss Global Investors Master Fund), has joined QVT in adding Twinkies to its portfolio. It purchased 5.7%, also on Sept. 28.

Spokesmen for both funds declined comment, as did a spokeswoman for IBC. In a research note following the bankruptcy filing, Mr. McMillan, of Prudential, admitted that he was “a bit surprised” by the move. Prudential is struggling, he wrote, “to determine equity values with big dilution likely from convertible and bank debt issues. We still think $150 million [in earnings before interest, taxes, depreciation and amortization] is achievable relatively quickly and if debt is $0.7 billion there should be something left for equity holders” after a restructuring. He suggested that equity holders need representation “to avoid massive dilution to bondholders and new management.”

The court has scheduled the first omnibus hearing in this matter for Oct. 21 and a meeting of the creditors for Nov. 1.

CFaille@HedgeWorld.com

Contact Bob Keane with questions or comments at: bkeane@investmentadvisor.com</a.