The financially struggling London Fog Corp. announced yesterday that it had reached an agreement with its bankers in which they will lend the company an additional $120 million and give it a break on its crushing debt.
In exchange, the syndicate of 23 banks will receive an 80 percent stake in the company, nearly wiping out the two major owners.
"This has not been an easy negotiation by any means, and we are pleased to get it over with," said Robert E. Gregory Jr., the company's chairman and chief executive officer. "Now we can get back to concentrating on running the business instead of financing the business."
The agreement should not affect the company's Eldersburg headquarters, which has about 500 workers, or the company's last remaining domestic factory, in the Park Circle Business Park in Baltimore. The Baltimore plant, which was restarted in February, will have 220 workers when it reaches full production in May.
Under the agreement, which must be made final by May 15, the company gets a two-year, $120 million line of credit, which is crucial to producing its fall line of merchandise.
Most of the interest on its remaining debt will be deferred for two years, cutting about $35 million in expenses.
The banks, headed by Chemical Banking Corp. of New York, also agreed to eliminate $106.4 million of the company's $317.4 million debt. In its place, the banks will receive a new issue of voting preferred stock priced at an equal value. That stock, which will pay no dividend, will take priority over existing stock, Mr. Gregory said.
The preferred stock will be in addition to the banks' 80 percent equity position.
An additional $26.6 million of that preferred stock will be distributed to management and current stockholders.
The remaining $211 million in bank debt will be converted into a seven-year, $175 million-term loan and a seven-year $36 million note.
Whether the new arrangement, -- which still leaves the company with a large debt and a relatively small amount of working capital -- works is still open to question, said Howard Davidowitz, chairman of Davidowitz & Associates Inc., a national retail consultant.
"I think there is a 50 percent chance that they will be in Chapter 11 in the next two years," he said.
"The only reason I give them that much chance is because of Gregory. Anybody else I would give a 10 percent chance."
By choosing the reorganization, the company avoids the long, costly and disruptive alternative of a Chapter 11 case, Mr. Davidowitz said. However, such a filing would leave the company with no debt and more cash, he said.
"The road they picked puts them on a very tight tether," Mr. Davidowitz said.
Mr. Gregory and C. William Crain, the company's president and chief operating officer, were brought in at the beginning of the year by the owners and creditors to turn the company around. Both men are well known for their turnaround success at the scandal-beset Gitano Group Inc., a maker of designer jeans.
While the ownership changes, the top management -- which is the fourth in the last two years -- is not expected to, according to a source connected to the banking syndicate. The source said the banks support Mr. Gregory and do not plan to put their own people in management.
A spokesman for Chemical Bank declined to comment.
With its new stake in London Fog, which has $350 million in annual sales, the banks get to appoint four members to a new seven-person board of directors. The two current major stockholders -- Merrill Lynch Capital Partners and GKH Partners -- each get to appoint one board member. Mr. Gregory will take the seventh seat on the board.
The big losers in the deal are Merrill Lynch, which held 58 $H percent of London Fog's stock, and GKH, which had a 36 percent share.
"The two biggest investing partners have had a very close shave and a haircut," said Alan G. Millstein, editor and publisher of Fashion Network Report. "They are now minority players. They have been wiped out virtually in the new London Fog."
And with the banks now in control, they will be eager to sell the operation once it is made presentable, he said.
Merrill Lynch, which bought London Fog for $275 million in 1990, would not comment on yesterday's agreement. GKH, a Chicago investment group that became a shareholder when Pacific Trails Inc. of Seattle merged into London Fog early last year, also would not comment.
Highlights of agreement between London Fog Corp. and its bankers:
* Syndicate of 23 banks eliminates $106.4 million of the company's $317.4 million debt in return for new voting preferred stock.
* The remaining $211 million in bank debt is converted into a seven-year, $175 million loan and a seven-year $36 million note.
* The banks get an 80 percent stake in the company.
* London Fog gets a new $120 million line of credit.
* Most of the interest on the company's existing debt is deferred for two years.