Textile Companies Weave Tales of Disappointment and Strife

Two high yield textile companies were in the spotlight last week as portfolio managers eyed them with concern.

Dallas-based Pillowtex Corp. reported a larger-than-expected loss for the fourth quarter and that, in turn, prompted some buysiders to question whether the issuer would make its upcoming coupon payments.

And if that were not enough for textile investors to worry about, 750 miles away, West Point, Ga.-based WestPoint Stevens Inc., which makes linens, towels and comforters, was hit with several investor lawsuits in the wake of its proposed management buyout.

Pillowtex, currently in discussions with Bank of America over covenants on its bank loans, owes a $6.3 million coupon payment on its 10%, $125 million issue on May 15; and owes $8.3 million on a 9%, $185 million issue on June 15.

The notes are trading around 40 cents on the dollar, according to an analyst who tracks the company, down steeply from their peak in the 90s last summer.

In addition to the two bond coupon payments, there also is a convertible issue in which the investors have a put-option. If they exercise that option, the company could be looking at an additional $66 million payment, according to Paul Drotch, an analyst at Federated Investors.

However, that obligation is unlikely to occur, Drotch said, because if the company is forced into bankruptcy, the convertible investors are behind the bondholders in the capital structure and unlikely to recover much of their payment.

All of this turmoil, however, has prompted Standard & Poor's Rating Services to downgrade the company twice in the past six months to its current level of triple-C.

The issuer reported last week a fourth quarter loss of $20.5 million, or $1.56 a share, compared with a net income of $15.1 million in the year-ago period. The expected loss from First Call/Thomson Financial, which compiles analysts projections, had been about $1.08 per share.

One portfolio manager who was especially bearish on the company said he expected a bigger loss than First Call projected, but still not as much as the actual loss posted last week.

Charles Hansen Jr., chairman and chief executive officer of the company, acknowledged that 1999 was the toughest year in the company's history, but he tempered that with a more optimistic outlook. A conversion of the company's data systems hurt practically the entire business but that, he said, is now behind it.

"Most of our plants are running at record rates of efficiency, the accuracy and timeliness of our shipments has improved, and our billing and collection procedures have improved tremendously," he said in a prepared statement.

The other textile issuer causing a rumble last week, WestPoint Stevens, was defending its actions in the face of investor unrest.

The company had proposed a management buyout the week before in which Chairman and Chief Executive Holcombe Green Jr. and other managers offered to buy the majority share of the company that they do not already own.

They offered to pay $21 a share, a 50% premium over the $14 a share at the time of the announcement. Stockholders still maintain they should be paid more.

Bondholders also have a stake in the outcome, as some were wondering if the management buyout would trigger the change of control option. Barring that, an analyst said, bondholders' biggest concern would be that a newly organized company has more debt that is senior to their investments.

The bonds were trading in the mid-80's last week.

Moody's Investors Service said it placed WestPoint Stevens' bonds on review for a possible downgrade last week. That included the 7.875% senior notes of '05 that currently carry a Ba3 rating; the senior notes due in 2008 with a 7.875% coupon that also carry a Ba3; the senior implied rating of Ba2; and the senior unsecured notes with a current Ba3 credit quality.