London Fog Corp.'s chairman said yesterday that he is confident the company's lenders will come through with a much-needed cash infusion in time to keep the company out of Chapter 11 bankruptcy proceedings.
"What we're discussing is trying to get something formally committed from them in the next few weeks on our working capital needs," Robert E. Gregory Jr. said in an interview. "I feel very good we're going to get the additional financing."
But if it is not forthcoming, "then that's where you would use Chapter 11," he said.
Mr. Gregory said the additional money from a syndicate of more than 20 banks, which is already owed $300 million by the troubled company, would be used to produce London Fog's fall line.
His candid comments about the condition of the Eldersburg-based raincoat company comes seven weeks after he was hired to turn around the company. Since then, he has cut costs by moving the company's headquarters back to Carroll County from Darien, Conn., and has cut the company's sportswear and children's lines to focus on its core raincoat and outerwear business.
But the company's biggest problem is its enormous debt of about $300 million. That has been reduced from its peak of $425 million in the summer, as the company received payments for fall sales.
The company, which has annual sales of about $350 million, will probably miss interest payments on the debt later this year, perhaps as early as next month, Mr. Gregory said.
Yet the well-known turnaround expert said he is confident the banks will continue to support the company, because forcing London Fog into Chapter 11 could harm its reputation and lessen the likelihood that the creditors will be repaid fully.
"Number one, they've got confidence in the management team, because our track record says we can do positive things," he said. "And number two, they think we have a strong brand and brand franchise at the stores," Mr. Gregory said.
"The alternative of not lending the money is you could destroy the brand franchise, and it makes the overall collateral go down substantially," he said.
How much the company will need has not been determined, Mr. Gregory said.
"We're in the process of trying to quantify what our cash flow requirements will be over the next year," he said.
However, another uncertainty facing London Fog is the struggle for control of the company between its equity holders -- represented by Merrill Lynch Capital Partners and GKH Partners -- and the banks holding the debt.
"Those [discussions] generally tend to get pretty tough and nasty, because the creditors in effect say, 'We own the company because you owe us so much,' and the equity people say, 'In fact, we do still own it,' " Mr. Gregory said."
"I've been going on it for six weeks, and it gets to be very exasperating," he said. "If the thing blew up between the equity and the debt holders, it could have some impact on the financing commitment that we receive."
Yet he said that if the financing is provided, the battle for control may taper off as the opposing parties feel less need to assert control.
There are also tensions between Merrill Lynch, which holds a 58 percent share of the stock, and GKH, a Chicago investment group that holds 36 percent of the equity.
"There's no question that tension has been there," he said. "But you also have tension among various creditors, as well."
The disagreements have been over assigning blame for the company's problems and over who should control the company -- not Mr. Gregory's management of the company, he said. "I've got their full support. That's has not been the issue."
Whether the company files for Chapter 11 protection should not affect the reactivation of London Fog's last U.S. plant in the Park Circle Business Park in Northwest Baltimore, Mr. Gregory said. That plant, which started production early this month, will have about 220 workers when it is in full production in the next few months.
The company also plans to close an unspecified number of its 120 outlet stores, eliminating those that are unprofitable, Mr. Gregory said.
Though the company is trying to avoid Chapter 11, the company has hired noted New York bankruptcy attorney Myron Trepper.
"It's just as a precaution," Mr. Gregory said, adding that Mr. Trepper was hired last year. "You have to explore all options and prepare for all options."
In fact, it is normal for companies in financial distress to hire a bankruptcy attorney as a tactic to make creditors more cooperative, according to Howard Davidowitz, chairman of Davidowitz & Associates Inc., a national retail consulting firm.
"It's like a waltz," he said. "It's the only way that management will have credibility for the threat of bankruptcy."
London Fog's plight worsened during the most recent outerwear selling season, one of the weakest in 20 years because of unusually mild fall and winter weather.
But Mr. Gregory is hopeful the company will have an operating profit in the next fiscal year, which starts March 1.
"I feel pretty good about the long-term prospects of this company regardless of whether we go into Chapter 11 or not," Mr. Gregory said.