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London Fog reaches debt accord


London Fog Corp. has restructured its debt, staving off

bankruptcy at least for the time being, company officials and creditors said yesterday.

But analysts and company executives warned that the deal -- in which banks forgave one-third of the company's $317 million in debt in return for control of the company -- may not sufficiently lighten the debt load that has caused much of the raincoat company's problems.

The Eldersburg-based company will still have $211 million in debt on top of whatever it borrows from its new $120 million credit line, noted the company's president, Robert A. Gregory.

"This was an imperfect refinancing. But it is going to allow us to operate normally," especially for the next two years, when some of the interest payments on existing debt will be deferred, he said.

"The debt will need to be restructured down the road, probably," he added. He declined to say when he thought the debt would have to be renegotiated.

Mr. Gregory said managers opted for the settlement instead of filing for bankruptcy, even though reorganized companies usually emerge with little debt, because they were afraid that London Fog would not survive more turmoil.

In the last two years, London Fog has seen four sets of managers, a temporary move of its headquarters and the closure of all but one of its U.S. plants, he noted.

"It could have created substantial short-term operating problems that could have been fatal to the company," he said.

Mr. Gregory blamed the company's problems on a series of ownership changes that left the company swamped with debt and distracted managers from making and delivering good raincoats on time.

London Fog was first saddled with debt in 1978, when managers borrowed most of the $178 million purchase price to buy it from financially strapped Interco.

The debt load grew after the managers sold out to Merrill Lynch Capital Partners for $275 million in 1990.

In the new agreement, reached informally at the end of March and closed last week, Merrill Lynch and Chicago-based investment partnership GKH gave the banks 88 percent of London Fog's preferred stock and 80 percent of its common shares in return for restructuring the debt.

Mr. Gregory said London Fog lost more than $100 million on its operations alone -- not counting its debt payments -- in the fiscal year that ended in February. The company was not able to make all of its debt payments this spring, he said.

"It was mostly internal screw-ups" that caused last year's losses, he said, including missed shipments of raincoats. "There were failures to deliver."

But the company has fixed many of its problems and repaired relations with department store buyers, and it hopes to report $300 million in sales and a only a small operating loss this year, he said.

Business has picked up so much that the company has been adding workers to its Baltimore plant, raising the work force there from 220 to about 250 in recent weeks, he said. London Fog also has about 500 workers at its headquarters and distribution center in Eldersburg.

Analysts generally praised the settlement but echoed fears that it may not be enough to save London Fog from bankruptcy.

The settlement "is fine and professional," said Howard Davidowitz, chairman of Davidowitz & Associates, a New York-based retail consulting firm.

But, he added, the company's management troubles and debt "have nearly killed something that should have been impossible to kill."

"They still have lots of debt . . . and their reputation is damaged with their customers," he said.

If the company doesn't reduce debt and rejuvenate sales in the next year or so, "It's a 50-50 proposition" that it will end up filing for bankruptcy court protection, he predicted.

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