WPS: Let's Make a Deal

Heath E. Combs, Brent Felgner, April 11, 2005

New York — Key players in the WestPoint Stevens bankruptcy case are back to talking “deal” as the mill's investment bank begins marketing the company to more than 100 additional potential buyers.

Under a federal judge's mandate last week, the mill is pressing yet again to find a confirmable Chapter 11 reorganization plan — admittedly one that will still lead to the sale of its assets — as well as allow it to continue its business in a new leaner and wiser incarnation.

The effort is on a fast track. WestPoint said late Friday that it expected to complete an amended plan of reorganization with an asset sale component within days.

The company said it expects a bankruptcy court resolution within two weeks.

The firm is also continuing its plans for a court-sanctioned section 363 auction of the mill, as a fallback in the event the reorganization plan fails again. One way or the other, the mill said it expects to emerge from bankruptcy by the end of July. The current exclusivity period expires Aug. 31.

U.S. District Judge Robert Drain's rejection last Thursday of breakup fees for Wilbur Ross' stalking horse bid — which scuttled the Ross/Steering Committee plan of the moment — seemed clearly intended to level the playing field among all the competitors, including arch-rival Carl Icahn, in some remarkably Pattonesque ways.

During two hours of oral arguments, Drain prodded and probed representatives of the mill and the feuding creditor factions for a legal and negotiating formula that would set their hearts and minds on a course of reconciliation.

In sending the negotiations back to a structure within the Chapter 11 reorganization process, Drain might have altered the power structure of the creditors by suggesting that the first- and second-tier lenders may have greater equality under certain terms of an asset sale and possible payout by the mill in equity versus cash.

"The judge said, 'Look, this company's not broken. I want you guys to go back to the table and see if you can work something out under a plan of reorganization,'" noted M.L. "Chip" Fontenot, WestPoint's president. "It's probably a lot easier for the judge to have a confirmed plan rather than have to go through all the litigation surrounding one."

At issue has been the relative payout priority of the secured debt holders within the context of what attorneys in argument said is WestPoint's shrinking enterprise value, complicated by competing in a quota-free world with a business model waiting to change. Still, when pressed, the WestPoint attorney stated the company is not a "wasting asset," and later stated that the company retains considerable value.

The mill endorsed the steering committee/Ross plan in an effort to break the blocking positions between Icahn and the steering committee of first lien debt holders.

The steering committee, which controls 53.5 percent of the first-tier debt, brought Ross in as its white knight to counter a position by Icahn, that his "superpriority" claims should be paid. Icahn, who owns both first- and second-tier debt, claims $270 million in secured loans, making him the largest individual debt holder. Total debt in the company exceeds $2 billion.

But Ross and the steering committee have threatened Icahn's position. Using his first-tier leverage, Icahn argued that the steering committee can't vote his interests.

In the meantime, the value of Ross's offer for WestPoint, pegged at $687.5 million when announced in early March, has now fallen to $632 million — a $55.5 million decline in about five weeks — the mill's attorneys reported to the court.

"All we want is to be paid," said Bruce Bennett, attorney for the steering committee, in arguments before Drain. Bennett said the committee wants to be paid in cash, but in the alternative was prepared to join Ross in buying the company. "This is the best that can be done in a very bad case."

"Over the last seven months, the debtors have been pushing the plan process and seeking to find compromises that would be acceptable to all parties," WestPoint argued in papers seeking approval of the Ross plan. "However, neither the holders of a majority of the claims of the first lien lenders … nor Icahn have shown any indication that they will reach a consensus. This stalemate cannot be allowed to damage the value of the debtors business operations. The debtors have determined that the best outcome of this stalemate is to move forward with a section 363 sale for the entire business of the debtors."

In arguments last week, WestPoint Attorney John Rapisardi said, "We've spent an inordinate amount of time trying to get this case moving forward, and we often couldn't even get an extension of the exclusivity period beyond 20 days" at a time.

That may have changed under the new guidance from the court.

The operative word in the new effort is "confirmable." To date, every effort not just to confirm a reorganization plan, but in some cases even to bring one to the table, has been roundly rejected by one or more of the feuding classes of creditors. And, while all sides going into last weekend indicated they'd earnestly renew their efforts to find consensus, no one offered the slightest hint, at that point, where the middle ground might lie.

"That remains to be seen, but clearly the judge said (Thursday) he wants everyone to try to confirm it within the plan," said Peter Wolfson, attorney for Aretex, the Carl Icahn affiliate.

Like Wolfson, some other attorneys involved in the case offered little more than a verbal shrug, a "we'll see," while acknowledging the effort might well end up back before the judge for approval of a section 363 court-sanctioned auction.

Moreover, while much of the attention has focused on the big name players in the contest — Ross and Icahn — the broader story also centers on several consortiums of high risk-taking distressed debt companies and hedge funds seeking their payback and control of the final entity.

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