Cherokee Creditors to Swap Debt for Stock

Creditors of Cherokee Inc. will swap much of their debt claims for 77% of the common stock of the Sunland-based apparel maker under a tentative agreement between the parties.

The proposed change was expected. Cherokee had said in October that it was in restructuring talks with the creditors, and it’s not uncommon for debt holders to exchange their claims for stock in order to keep a company alive.

Cherokee is hobbled by $190 million of debt and preferred-stock obligations, but under the proposed restructuring, that burden would drop to about $90 million.

The reduction also would cut Cherokee’s debt-interest costs and preferred-stock dividends to about $11 million a year from $27 million, the company said.

In the process, Cherokee’s controlling stockholder group, led by its chief executive, Robert Margolis, and Santa Monica investor Jeffrey Deutschman, would surrender most of its stake in the company’s common stock to the creditors.

Deutschman had led a $174-million leveraged buyout (LBO) of Cherokee in 1989, which created most of the debt now hurting the company.

The 23% of Cherokee’s common stock not owned by the creditors would be divided among the Deutschman group, Margolis and other Cherokee employees, and the public.

The public will retain 8% of the stock.

Cherokee had its initial public offering in June, 1991, when it sold the stock for $6.50 a share to help reduce the LBO debt.

The stock now trades for about 88 cents.

The restructuring is conditioned on the approval by certain of the holders of Cherokee’s subordinated debt.

If that approval isn’t attained, Cherokee said it would enter federal Bankruptcy Court with a “prepackaged” reorganization centered around the plan. It would then hope to emerge from Chapter 11 by June, Cherokee said.

The process “will have no adverse impact on Cherokee’s customers, suppliers or trade creditors,” the company said.