Rating rocks WPS stock

Don Hogsett, May 14, 2001

ATLANTA — Slammed by a harshly worded downgrade of a billion dollars in WestPoint Stevens debt, stock in the textiles powerhouse slumped by almost a third last week, dropping to $4 a share, unleashing a massive sell-off in an already battered textile stock.

Stock in the textiles giant, once the industry's largest player and still its low-cost producer, has now fallen by almost 90 percent over the past two years, to a current level of $4 from a high of almost $38.

In the process, the company's market capitalization has been slashed to just $198.2 million. And the value of the personal stake of majority owner and ceo Holcombe Green Jr. has been shredded by roughly $630 million, from a high of more than $700 million to just $74 million last week.

Triggering the slide in WestPoint stock, Moody's Investors Service took the unusual step of downgrading a billion dollars in WestPoint debt by four full steps, to its lowest junk-bond rating of "Caa2," from a previous rating of "B1." Moody's cited the company's mounting debt load of $1.8 billion, a weak balance sheet, rising costs and a weak sales outlook.

Moreover, said the downgrade dated May 4, "The negative outlook reflects Moody's expectation that the company's sales will not materially improve this year and, in fact, the company's core product sales may actually decline as vendors look to streamline their category presentation and continue promotional activity to stimulate weak sales."

The downgrade drew an unusual and feisty response from ceo Green, who charged Moody's with getting some of its facts wrong, and ignoring an estimated $225 million in annualized new sales coming on stream. It is extremely uncommon to challenge a ratings action through a press release.

Jabbing away at the Moody's report, he charged it with "essentially ignoring over $225 million of annualized sales gains reflected in the company's acquisition of Chatham blankets and expanded licensed sales of Ralph Lauren Home and Disney Home."

And hammering away at the report's accuracy, Green said it misstated the company's debt ratio — debt compared to cash flow — at a level of 9.1 times, compared to 5.7 last year. In fact, said Green, the ratio was just 6.2 times, compared to 4.7 last year.

Emphasizing the importance of the new Disney, Lauren and Chatham programs, Green later told shareholders at the company's annual meeting, held here last week, that they will enable WestPoint "to grow sales in 2001 by 5 percent or better, thus increasing our market share. We see similar gains based on these new programs in 2002. We also see the ability for WestPoint to generate significant cash flow through better working capital management and reduced capital investment."

With WestPoint stock now trading at historic lows, and apparently anxious about a possible takeover threat, the company put in place at last week's annual shareholders' meeting a "poison pill" designed to protect shareholders, including Green with his more than 35 percent stake, from any hostile bid. Green said: "The board of directors did not adopt the rights plan in response to any specific takeover threat. The board believes that the rights plan represents a sound and reasonable means of safeguarding the interests of stockholders. It seeks to ensure that stockholders realize the long-term value of their investment."

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