MOODY’S DOWNGRADES FTL

Byline: Thomas Cunningham / Rosemary Feitelberg

NEW YORK — Moody’s Investors Service downgraded the rating of Fruit of the Loom Friday, citing the company’s operating problems and the likelihood that its performance for the rest of the year would be “significantly” weaker than expected.
In changing the ratings, which affect about $1.4 billion in debt, Moody’s also said FTL might not be in compliance with its bank covenants at the end of the third quarter.
On the plus side, Moody’s considered FTL’s strong market share, well-known brands and the steps the board was taking to make positive change.
“The company’s reorganization of senior management underscores the need for significant change and the persistence of the company’s problems,” Moody’s said.
As reported, William Farley stepped down as chief executive officer on Aug. 30, and at the same time the company announced formation of an office of the chairman, made up of Farley and board members Sir Brian Wolfson and Dennis Bookshester. At the same time FTL warned its second-half results would be below analysts’ expectations.
Bookshester is serving as interim ceo and he heading the executive search for Farley’s successor.
However, Moody’s added it expected, “because the personnel searches are being initiated now, substantive and consistent performance is not likely to occur for some time.”
The new management team may find it desirable to take additional restructuring charges, Moody’s said. These could include adjustments to the amount of goodwill on the balance sheet or reductions in the valuation of assets, including inventory, through markdowns or production curtailments, Moody’s added.
Included in the downgrade were FLT’s 7 percent debentures due in 2011 and its 6 1/2 percent senior notes due in 2003, both of which moved to B2 from Ba3. Moody’s also lowered FTL’s 8 7/8 senior notes due in 2006 and its 7 7/8 senior notes due in 1999 to B3 from B1. The ratings outlook is negative, Moody’s said.
The Moody’s announcement followed a decision by Standard & Poor’s last Tuesday to place Fruit of the Loom’s debt on credit watch with negative implications.
On Thursday, a company spokeswoman told WWD the executive search was expected to take six to nine months. FTL was looking for a “world class executive” with a lot of knowledge about the apparel industry, she said.
FTL may need to look outside the apparel industry to find the right executive to turn the company around, according to Ira Taub, high-yield analyst at Bear, Stearns. A chief with a background in retail or marketing might be able to take advantage of the equity in the Fruit of the Loom name, he noted.
“The key is to bring in someone who is talented and isn’t afraid to make big changes,” he said. “This is one of the most well-known brand names in America — with the right talent behind it, they can make it shine again.”
The company’s stock last week set a new 52-week low. On Friday, the shares gave up 3/8 to close at 5 3/8 on the New York Stock Exchange. Fruit of the Loom’s stock has fallen steadily from a 52-week high of 24 1/8, set last year.
FTL’s debt continued to slump also, as its 8 7/8 senior notes, which offer less security to investors than some of FTL’s other bonds, reportedly were trading at less than 50 cents on the dollar late last week.
“It’s a meltdown,” said Michael Glick, head of high yield and corporate research at Prudential Securities, referring to the performance of the bonds. Glick said he “wouldn’t rule out” the possibility that FTL might have to restructure.
However, John Ray, FTL’s vice president, chief administrative officer and general counsel, denied a major debt restructuring was necessary, particularly because FTL’s liquidity generally improves in the second half of the year.
“We certainly may have to have a discussion with our lenders regarding financial covenants, but I’m not envisioning any large-scale restructuring,” he said.
FTL’s cash flow (earnings before interest, taxes, depreciation and amortization) slumped from $306 million for the 12 months ended Jan. 2, to $185 million for the 12 months ended July 3, according to Glick. And things may get worse.
“The company has not been able to give investors a level of comfort that they’ve hit the bottom,” Glick said. “It’s gotten to the point where I think this would be perceived to be a distressed situation.”
Commenting on the possibility of an acquisition, he said, “If I were a competitor, I think I might be able to get it cheaper by waiting.”
However, Taub said the company told analysts in a conference call last week that it was confident it would have the cash flow to cover all its debt requirements for the next six months.
Ray said FTL would get better results after it solved its manufacturing and inventory problems. Sales were still strong, particularly in activewear, he said.
“We’re in a planning mode for 2000 and we’ll make whatever production and operational adjustments are necessary to make sure this doesn’t happen again,” Ray said.