Investor could be lifeline for Feltex

Carpetmaker Feltex is in breach of its banking covenants and will be lucky to break even this year, but it has found a new cornerstone shareholder, the company revealed yesterday.

Feltex said it had received a proposal from a New Zealand company, which if implemented would see that investor become a cornerstone shareholder and underwrite a capital raising.

"A successful capital raising is fundamental to the future of the company," Feltex said in a statement. It refused to reveal the identity of the mystery investor.

"Feltex is in breach of certain covenants in its bank facility and is in discussions with the bank regarding those breaches," the company said.

Feltex was not in monetary default under its facility agreements and the bank - understood to be ANZ - had been kept informed of developments with the potential investor.

The company also gave more detail on its trading update from earlier this month, when it forecast full-year earnings before interest, tax, depreciation and amortisation - normalised by eliminating restructuring and one-off corporate costs - of between $20 million and $21 million.

Feltex said yesterday that the one-off corporate costs were $7.1 million, and restructuring costs were $15.6 million.

With these costs totalling $22.7 million, Feltex looks unlikely to make a trading profit.

In April and June last year, Feltex slashed that year's net profit forecast from $23.9 million to between $11.5 million and $12 million.

It launched a full review of operations. Chief executive Sam Magill and 46 senior executives were replaced, the Braybrook yarn plant in Melbourne was closed and woollen yarn manufacture in New Zealand consolidated.

Spokesman John Walsh said the company was at a point where it needed to recapitalise and restructure the balance sheet.

"But it's also currently at a point where it's generating cash and trading conditions are improving."

Under the proposal the investor would underwrite an issue of new securities to shareholders, with a placement of new securities also made on the same terms directly to the investor.

Due diligence could take up to three weeks.

Feltex had met and continued to meet its obligations to its creditors, Walsh said, "and quite frankly the business is generating cash at the moment".

One analyst said a new investor could take a large shareholding, rescue the company from its financial obligations and restate it to "some sort of profitability".

"I think the main concern is that this isn't necessarily going to go ahead and if it doesn't the implication has been that Feltex is in quite serious danger of becoming bankrupt," the analyst said.

The market had already known Feltex was in breach of certain covenants "but obviously there's only so far the bank can go being forgiving".

Feltex shares were on a trading halt all day yesterday, but closed at 36 cents.