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BABY PHAT TO FOLD?

 

07.20.09 ----- Looks like Jennifer Lopez’s Sweetface isn’t the only urban line feeling the effects of the current recession.  Kimora Lee Simmons’ Baby Phat line may be the next to fold. 

 

Kellwood Co., one of the largest apparel manufacturers in the U.S., could be forced to file for bankruptcy soon after it failed to reach an agreement with its bondholders.

 

The St. Louis-based company, which employs roughly 2,000 people and owns popular clothing brands including Phat Farm and Baby Phat was taken private in February 2008 by buyout firm Sun Capital Partners for $542 million. (Baby Phat was bought by Kellwood in 2004 in a $140 million deal.)

 

The twin effects of a heavy debt load and a sharp drop in consumer spending have crushed the company's financial results.

 

Kellwood has a $140 million bond issue maturing Wednesday. Unable to refinance these bonds amid the constricted credit markets, Kellwood hired financial advisers to restructure its debt.

 

The firm has tried to defer the bond payment through a so-called exchange offer, in which the company would swap these bonds for ones maturing in 2014 with sweetened terms. Deutsche Bank AG, the largest holder of the bonds, elected not to tender the offer and a deal is unlikely to be reached, according to those close to discussions.

 

A Chapter 11 filing for protection from creditors could come as early as this week, though it remains possible the company could avoid such a move. The company has about $500 million in total outstanding debt and about $800 million in annual sales.

 

Michael Kramer, installed as Kellwood's chief executive officer 10 months ago, said Deutsche Bank had indicated it intended to accept the exchange offer, but then changed its mind.

 

"They've put us in a bad spot and we can't understand how they could rationalize this economically in any way," said Mr. Kramer, who said the company is in the process of hiring bankruptcy counsel. "We believe this bond offering benefits everyone and their position is very disappointing."

 

For Sun Capital, a bankruptcy filing by Kellwood, the firm's largest investment, would be a blow. The private-equity firm has seen 12 portfolio companies file for bankruptcy protection since the start of 2008.

 

With about 85 companies in the firm's portfolio and a strategy of buying ailing businesses few others will touch, Sun Capital executives say they expect failures in its investments.

 

Sun Capital's acquisition of Kellwood was something of a departure for the firm, which typically pays very little for deeply distressed businesses. In January 2008, Sun Capital launched a hostile tender offer for the then-publicly traded Kellwood after building a stake in the company and then trying to acquire it outright.

 

Amid the downturn, apparel manufacturers such as Kellwood have been clobbered as consumers cut back on spending and retailers slash inventory to adjust for slackened demand. On Thursday, U.S. retailers reported their 10th consecutive month of negative year-over-year sales, the longest decline on record, according to a Thomson Reuters index that excludes Wal-Mart.

 

In recent months buyout firms have scrambled to restructure the debt of their portfolio companies. Some private-equity-owned companies have successfully deferred debt maturities through exchange offers.

 

Others companies have refinanced their loans, but at a steep cost.



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