MOODY'S ASSIGNS Ba2 TO PROPOSED $600 MILLION GTD SENIOR SEC CREDIT FACILITY OF PILLOWTEX CORPORATION AND B2 TO PROPOSED GTD SR SUB DUE 2007; CONFIRMS B2 ON 10% SR SUB DUE 2006; WITHDRAWS RATING ON $175 MILLION REVOLVER. WITHDRAWS RATINGS ON FIELDCREST CA
New York, 11-21-97 -- Moody's Investors Service assigned a Ba2 rating to Pillowtex Corporation's proposed seven-year, $600 million credit facility and a B2 to its proposed $150 million, guaranteed senior subordinated notes due 2007. At the same time, Moody's confirmed the B2 rating of its Pillowtex's $125 million, 10% guaranteed senior subordinated notes due 2006. The outlook on the ratings is stable.
Moody's also withdrew the Ba2 rating on Pillowtex's $175 million senior secured revolving credit facility due 2001, which will be refinanced; the B1 rating on Fieldcrest Canon, Inc.'s $125 million, 11.25% senior subordinated notes due 2004; and the B1 rating on Fieldcrest's $125 million, 6% convertible subordinated debentures due 2012.
These rating actions conclude a review of the ratings of both Pillowtex and Fieldcrest that was initiated on September 11, 1997, with the announcement of Pillowtex's proposed acquisition of Fieldcrest.
Pillowtex's ratings reflect the combined entity's high leverage and negative tangible equity; low fixed charge coverage; its significant capital spending plans; customer concentration; and the challenges it faces in integrating a lower-margin company twice its size with a different culture and operational structure. However, the ratings are supported by Pillowtex's history of positive operating earnings; its strong management; and its quality brands and licenses. The ratings also incorporate management's commitment to margin improvement via capital upgrades, expanded merchandising efforts, and improved product mix. In addition, the combined company will be the largest manufacturer and marketer of home textile products in the U.S., with some of the most widely recognized brand names.
Pillowtex's proposed $600 million credit facility consists of a six-year, $350million revolving credit ($180.2 million drawn at closing), a six-year, $125 million Senior Term A facility, and a seven-year, $125 million Senior Term B facility. Both term loans amortize quarterly.
The Ba2 rating on the facility recognizes the benefits of the security package, which includes all material assets of Pillowtex and its domestic subsidiaries as well as a pledge of 100% of the capital stock of the domestic subsidiaries and 65% of the capital stock of foreign subsidiaries. The facilities are also guaranteed by all domestic subsidiaries. In its analysis of a distress scenario, Moody's concluded that the combination of physical asset value and quality brand names could lead to a reorganization providing full protection to the secured lenders.
The B2 rating on the guaranteed senior subordinated notes also reflects their contractual subordination to the secured lenders.
Pillowtex's proposed notes will refinance its existing credit facility as well as Fieldcrest's 11% notes. Remaining Fieldcrest obligations, including the 6% convertible subordinated debentures, will be solely the obligations of Fieldcrest as a wholly-owned subsidiary of Pillowtex. Moody's withdrew the rating on the convertibles because separate financials are not expected to be available for the Fieldcrest subsidiary.
On a last 12 months pro forma basis, assuming conversion of the Fieldcrest 6% debentures, the combined entity's debt represents a steep 74% of book capitalization and 92% of tangible book capitalization The fixed charge coverage, inclusive of rents is low at 1.5 times while EBITDA less capital expenditures covers interest 1.3 times. Moody's believes that the process of integration of a much larger company, realignment of assets, and planned commencement of a significant capital expenditure program could stress coverages even further for the first 12 months. However, improved production capability, particularly in sheets, reduction in overhead costs and shedding of non-essential assets may improve operating margins and EBIT return on assets over time.
The new entity's seasonal working capital needs should be less than Pillowtex's alone due to the broader product mix. Pillowtex's competitive stance regarding department stores required higher inventories of blankets and certain licensed top of the bed products. The inventory days peaked at 179 at nine months 1997, but should decrease to about 100 days on a year end pro forma basis.
The company has begun a multi-year, $240 million capital expenditure program partially designed by Fieldcrest which will focus equipment upgrades, automation, operational logistics and information systems controls. Much of the investment is targeted at the Kannapolis plant, particularly in sheets. Any cash generated from the sale of non-core assets will be used to accelerate the capital expenditure plan.
On a pro forma basis, the company will depend on Wal-Mart for 19% of sales. This concentration risk is mitigated by the company's position as the sole U.S. supplier of top-of the bed products to Wal-Mart.
Pillowtex Corporation is a closely held public company based in Dallas, Texas. It is a leader in the design, manufacture and distribution of bed pillows, blankets, mattress pads, down comforters, and other bedroom furnishings. It markets under numerous company-owned trademarks, trade names and customer-owned private labels, as well as certain licensed trademarks including Ralph Lauren Home Collection, Cannon, Royal Velvet, Charisma, Touch of Class, Comforel, Martex, Mickey & Co., and Dacron.
Fieldcrest Cannon, Inc., located in Kannapolis, North Carolina, is a leader in the manufacturing and marketing of home furnishing products, primarily towels and sheeting, under the trademarks Fieldcrest, Cannon, Royal Velvet, Charisma, Touch of Class, St. Mary's, Cannon Royal Family, Caldwell, Sure Fit, and private label brands.
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