Malden Mills Files For Voluntary Ch. 11 Reorganization

Malden Mills filed yesterday for voluntary Chapter 11 reorganization in
a Worcester, Mass. U.S. bankruptcy court.

“I have to do it. I am going to do it,” said company president and CEO
Aaron Feuerstein to ABC cameras shortly after the filing. “I have to
keep my eyes on the ball, and we have to win in the end.”

The Ch. 11 bankruptcy protection by the Lawrence, Mass.-based
manufacturer of Polartec fabrics was a condition placed on a
debt-ridden Malden Mills by its lenders before the banks would release
$20 million in secured, short-term, debtor-in-possession (DIP)
financing.

It is estimated that the bank debt incurred by Malden was approximately
$160 million, including $20 million owed to German financial
institutions. Malden’s total assets were estimated at approximately
$300 million against $250 million in total liabilities at the time of
the filing.

According to a statement released by Malden late Nov. 29, “The filing
was necessitated by the cost of servicing bank debt. A number of
factors contributed, including a sluggish retail market, the high costs
associated with rebuilding, and the closure of the company’s upholstery
division after a significant market share loss as a result of the fire.
(Click here to read more complete analysis from last week’s SNEWS® story)

Moody’s Investor Services took the action of cutting Malden’s debt
rating the day before the filing because, according Moody’s, a weaker
demand for Malden’s fabrics, along with a downturn in the U.S. textile
industry makes it likely that Malden will generate less cash than
expected due to the recession and fixed costs related to
underutilization of its plant. Prior to the downgrading, Moody had
expected Malden’s premium prices coupled with a cost-containment
program would lead to improved profit margins, generating sufficient
cash to reduce debt.

It is expected that Malden will have to take some restructuring charges
and perhaps initiate a small number of layoffs as part of this
reorganization. However, company officials assured SNEWS® that although
news reports hint of layoffs, and while even a plant employee stated
his fears for the future to an ABC camera yesterday evening, layoffs
would be minimal, amounting to less than ten. It is also likely that
Malden will seek to terminate office leases in other cities —
typically utilized as sales offices — as well as to streamline
operations by realigning departments and eliminating redundant
positions. It is also rumored that Malden may be considering the sale
of its $40 million foam business as a means to generate cash, reduce
costs, and focus 100 percent of the company’s energy on continuing to
grow the Polartec brand.

As if the bankruptcy filing is not enough, Malden’s contract with
UNITE, the labor union representing factory workers at Malden, expires
today. Malden representatives told SNEWS® that the company is in the
process of negotiating a new contract, which the company expected to
have in place by the end of the day. Malden stressed to us that the
negotiations are having no effect on production at Malden’s factories.

Meanwhile, manufacturers and retailers that have built a significant
foundation of business with Malden Polartec products continue to
express their support for the beleaguered company.

“Malden has been a great partner of the outdoor industry and REI for
over a decade. Despite their current financial re-structuring, they
remain a key vendor and partner in the development of REI Brand
product,” Dennis Madsen, REI’s CEO told SNEWS® . “We intend to stick with
them. I fully expect they will bounce back from this setback just as
they did from the fire a few years back.”

Said Mike Egeck, president of The North Face, a company also listed as
a creditor of Malden’s in the Ch. 11 filing: “The filing is not a
surprise at all since Malden has been working very closely with us. We
were hoping, certainly, that they would be able to work out a deal with
the banks and creditors, but since they could not, our focus is now on
working with them to understand the details of this interim financing
so that we can work with them going forward.”

As the dust of this reorganization move still settles, Malden assures
everyone that business continues as usual. Gorlitz Fleece GmbH, a
wholly owned subsidiary of Malden Mills, based in Gorlitz, Germany;
Malden’s plant in Lawrence, Mass.; and the company’s customer service
centers in Maastricht, Netherlands, and in Lawrence, Mass., are all
operating as usual at this time.

“In the long term, we are going to succeed,” said Feuerstein to ABC cameras yesterday. “I am sure of it.”

SNEWS® View:
Since hearing the official word of the filing yesterday afternoon, we
have chatted by phone and email with a large percentage of company CEOs
and presidents representing many of Malden’s key accounts. What is
universally expressed is that Malden has been very up front for
sometime now with its industry partners about this situation and what
it means. That said, many of these same companies have lined up
alternative commercial options to the primary fabrics Malden has
traditionally been supplying should Malden stumble or be unable to fill
orders as required. Malden competitors have to be salivating right now,
hoping against hope that Malden’s difficulties translate into increased
sales for them. SNEWS® points out to these hungry competitors that they
might want to stow their knives and forks for now as no feast appears
likely. Those companies that have lined up commercial options state
unequivocally that Malden’s quality is the best and Malden’s/Polartec’s
name recognition in the marketplace is the strongest.

When it came to its credit, Malden played the political cards with
gusto, no doubt making it very difficult for the company’s bankers and
creditors to do anything but arrive at a deal that would ensure the
continued survival and, they all hope, future prosperity of Malden.

Company insiders also told us that since news of Malden’s financial
troubles broke last week, calls and letters have flooded into the
company headquarters from all over the country, all offering
assistance. Many letters received in the last week contained small
amounts of cash and personal checks. Seems folks have a genuine
fondness for a company and a company CEO that tried to do the right
thing by its employees following the fire in December 1995 that
devastated the company.

From what we can tell, Malden has a relatively sound financial base
with a potential for growth, and that this filing is more a matter of
banker issues than market challenges — though certainly the current
market conditions have not helped matters. There is little doubt given
the current economic climate that banks are tightening loan covenants
to an extreme as evidenced by the increase in Ch. 11 filings in both
outdoor and fitness, as well as in other industries, during the last
few months. Of course, changes in bankruptcy law that could make it
more difficult to file for bankruptcy after Jan. 1, 2002, may also have
an affect on the current number of filings. We would not be surprised
if more companies, saddled by heavy debt loads, slipping retail sales,
and untenable leases, either choose or are forced to choose to push the
Ch. 11 escape button.