Linwood, PA, July 11--Turmoil in the auto industry continues to take a toll on smaller companies, and Foamex International may emerge as the next victim, according to a report from Dow Jones.
The news service said that the supplier of foam products, which counts auto suppliers and manufacturers for about 30% of its revenues, has reported quarter after quarter of net losses. Now, nervousness is mounting in the market about the company's ability to pay upcoming bond maturities and avoid violations of its bank and bond agreements.
"We believe a restructuring is inevitable," wrote analysts at Montpelier, Vt.-based high-yield research firm KDP Investment Advisors in a research note Friday, a stance they first iterated in June. If the company's board determines that a return to previous levels of profitability is unlikely, the report continued, "this could lead to a more accelerated timeline for a restructuring than we previously thought."
A Foamex spokeswoman declined to comment on the company's ability to pay upcoming bond maturities or on the possibility it may have to restructure.
In the last several weeks, the Linwood, Pennsylvania based company's bonds have sunk. Its 9.875% notes due 2007 fell about 16 points last week to about 42 cents on the dollar Those bonds gained several points back this week, and then dropped again. The rollercoaster ride is emblematic of the company's uncertain future.
"I would not be surprised if they have some serious liquidity problems," said Shelly Lombard, high yield analyst at Gimme Credit, a research firm specializing in corporate bonds. "They are definitely sucking up cash."
The auto sector has been pummeled by recent production cuts by the U.S.-based auto makers, persistently high raw material costs and expensive labor and benefit costs. Though Foamex is only partially dependent on the auto industry, its other businesses, like its foam products, have also suffered at the hand of high raw material costs.
For now, Foamex is living largely on borrowed money. In recent weeks, the company has secured amendments on its bank agreements and lined up financing from its banks and from Silver Point Finance - the hedge fund that supplied down-and-out Krispy Kreme Doughnuts Inc. (KKD) with some of its bailout money - to help its short-term picture.
Next month, Foamex will need to come up with $52 million to pay off its maturing 13 1/2% subordinated note, a daunting prospect.
"It's definitely going to be tight," remarked Lombard.
Silver Point recently forked over $25 million to help Foamex refinance part of the debt that's coming due, but that money was diverted to be used for working capital - a red flag for the market.
Now, the company appears to be scrambling to eke more money out of its lenders. "Our understanding is that they are working on getting the banks to agree to draw the loans" to pay that August maturity, said Charles Tan, senior analyst at Moody's Investors Service. Silver Point is also expected to kick in more money.
In recent months, Foamex has also struggled to rebound from the loss of one of its largest customers - Johnson Controls Inc. (JCI) - which pulled its business, said Tan. Johnson Controls accounted for more than 12% of Foamex's sales in 2004.
On top of all of these problems, Foamex's chief accounting officer, Bruno Fontanot, resigned last week. The company didn't give a reason for his departure.
To generate cash, Foamex has embarked on a campaign to shed assets and use the proceeds to pay down its considerable debts. In April, the company sold its rubber and felt business for more than $38 million. Most of that money was slated to go to debt repayment, but the fact that Foamex still had to hit up its lenders for more money for that August payment is not a good sign.
