Delta Mills: cannot pay interest on 9 5/8% notes; bankruptcy possible

By Caroline Salls

Pittsburgh, Sept. 1 - Delta Mills, Inc. will not make the $1.49 million interest payment due Sept. 1 on its 9 5/8% senior notes due 2007 and is exploring financial alternatives, including Chapter 11, according to a company news release.

The notes indenture provides a 30-day grace period before the non-payment of interest will constitute an event of default.

There is $30.94 million in principal amount of the notes outstanding.

Delta Mills said it does not know if it will make the interest payment before the grace period expires.

An event of default under the notes indenture would also become a cross-default under the company's credit agreement unless it receives a default waiver.

According to the release, business conditions in the company's principal lines of business remain difficult, which is affecting liquidity.

Delta Mills said it has recently been informed by the U.S. Department of Defense that overall demand for the company's customers' products for the balance of the government's current fiscal year and into the next fiscal year will be considerably less than expected, even below the minimum levels contained in Delta Mills' customers' contracts.

At the same time, the company said defense department funding has been tightening up, resulting in less money being made available for supplies, and inventory levels are higher than normal.

As a result, the department has lowered its monthly delivery order quantities. The government-business customers have informed Delta Mills that the government wants to modify the contracts with a view toward significantly lower levels of business.

In addition, Delta Mills has entered into a $2.25 million contract to sell its inactive Pamplico plant and the adjacent real estate, but the closing on that contract has been delayed.

The company said it agreed to grant a short extension of the Aug. 28 closing date, extending the closing date to Sept. 6.

In addition to extending the closing date, the contract amendment requires that the $50,000 deposit toward the purchase price be held in escrow.

However, the potential buyer has now requested a further extension of the closing date of up to 60 additional days to complete its financing.

Delta Mills said it has not yet decided how to respond to the buyer's latest extension request and is considering its alternatives while it evaluates the request.

The company said it is unsure whether the potential buyer will ultimately have the funding to close the sale, and therefore Delta Mills is unsure whether it will be able to sell the Pamplico plant at all.

Financial alternatives

The company's board and management are actively exploring strategic alternatives, including selling or otherwise disposing of all or substantially all of its business through an insolvency proceeding, or starting an insolvency proceeding to liquidate the company.

Delta Mills said it is in discussions with a potential buyer for its Beattie plant and other assets. That potential buyer would also assume some company liabilities.

That potential sale would be structured as an acquisition under Sections 363 and 365 of the U.S. Bankruptcy Code, and Delta Mills would be required to file for Chapter 11 bankruptcy and to enter into an arrangement under which its Delta 3 plant would finish cloth for the potential buyer on a temporary contract basis.

Delta Mills said it is talking with an ad hoc committee of noteholders and senior lender GMAC Commercial Finance LLC, which has agreed to work with the company on a debtor-in-possession financing agreement.

Delta Mills is a wholly owned subsidiary of Greenville, S.C.-based Delta Woodside. Delta Mills manufactures textile products.

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