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Pillowtex plan includes unloading massive debt

Don Hogsett, Staff Staff -- Home Textiles Today, January 7, 2002

Derailed by $1.1 billion in takeover debt and crippling interest expense, losing more than a fifth of its sales, textiles giant Pillowtex is getting ready to emerge from Chapter 11 and shed almost $1 billion in debt.

Fifteen months after seeking protection from a clutch of angry creditors who had already forced the ouster of former ceo Chuck Hansen, the embattled textiles producer has filed a plan of reorganization with the U.S. Bankruptcy Court in Delaware, seeking to wipe out roughly $900 million in debt and get off to a fresh start.

Under the terms of the recovery plan, the embattled textiles producer will cancel all of its outstanding stock, leaving current shareholders holding the bag, then issue 50 million shares of new stock in a reorganized Pillowtex, handing much of it over to banks and other creditors, which would become the new co-owners of the major mill.

The debt for equity swap will leave the company with a much more manageable debt load of $198 million and reduce interest costs from a crushing $66 million in 2001 to just $16 million by 2003. The company said it projects the new stock will be valued at about $21.59 a share.

Under the terms of the plan, smaller creditors will be paid in full, in cash. Bank creditors will get about 47 cents on the dollar, receiving about $199.7 million worth of new stock, owning about 18 percent of the newly reorganized company. Unsecured creditors, including trade creditors, take a major haircut, getting back just one cent on the dollar, plus warrants, to be valued at a later date, for new Pillowtex stock.

If the plan gets the green light from creditors and the bankruptcy court, Pillowtex will emerge from bankruptcy a smaller, leaner company, one that has lost more than 20 percent of its sales over the past 12 months in a brutal and unforgiving retail environment.

Slimming down, Pillowtex has already shaken one monkey off its back, selling off its money-losing blanket division to a group of managers and a private investor. Grappling with global sourcing and over-capacity issues, the company has already shuttered four of its manufacturing plants over the past year and is planning to shut down even more, according to the plan filed in bankruptcy court. Pillowtex said its post-bankruptcy strategy "will incorporate further rationalization of manufacturing capacity in order to concentrate production on higher-margin products" and eliminate "uneconomic facilities."

A stated goal is to transform Pillowtex from a manufacturer to a marketer of its own branded products, shifting much production overseas. Already the company has begun the process of moving looms to India to ramp up production there, first to produce goods for the U.S. market, and later to produce goods under the various Pillowtex brands, like Royal Velvet and Charisma, for sale in overseas markets.

In the plan filed in bankruptcy court, Pillowtex said it has identified several overseas manufacturing partners that "will serve as an extension of … Pillowtex's U.S.-based facilities, employing production and technical expertise transferred" from Pillowtex plants in the United States.

Ironically, Pillowtex could emerge from bankruptcy with less debt on its books than either of its two larger competitors, WestPoint Stevens or Springs Industries. With less than $200 million in debt, Pillowtex would actually have a stronger balance sheet, at least on paper, than Springs, with its $295 million in long-term debt at the close of its second quarter before going private. And Springs' debt load has surely increased after the company's new owners borrowed to buy the company and take it private. And WestPoint remains weighed down by a crushing debt load of $1.6 billion.

Climbing back on track
Post-bankruptcy three-year sales & earnings forecast

2001 2002 2003 2004
( ): denotes loss
a: 2002 operating profits forecast includes a $60.3 operating loss for the first half of the year, while still operating under Chapter 11, followed by a $29.6 million operating profit in the second half of the year, following the company's emergence form Chapter 11.
b: 2002 net loss forecast includes a $102.3 million loss for the first six months of the year, while operating under Chapter 11, followed by $11.2 million in net income during the second half of the year. Operating and net losses for the year include $40.2 million in asset impairment charges; $11.9 million in restructuring costs; and $15.9 million in bankruptcy costs.
Net sales $1,052,933 $970,044 $1,002,700 $1,071,069
Avg. gross margin 2.0% 9.8% 13.8% 14.2%
Op. costs 8.2% 7.6% 6.9% 6.6%
Op. income ($119,818) ($30,757)a $68,789 $81,879
Interest expense 65,698 34,826 16,468 15,319
Net income (221,691) (91,139)b 32,710 39,936


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