Farley Inc. Unit Defaults on a Big Bank Loan

A division of Farley Inc. formed to acquire West Point-Pepperell Inc. said Monday that it had defaulted on a $796-million bank loan and would be unable to pay interest owed to holders of $705 million in junk bonds.

The announcement increased doubts about the ability of Chicago industrialist William Farley to complete his $3-billion acquisition of Pepperell, the giant textile maker based in West Point, Ga.

Farley officials did not return telephone calls seeking details on the moves outlined in a three-paragraph statement issued Monday.

The statement said the Farley unit, West Point Acquisition Corp., had offered to give stock to junk bond holders in exchange for a delay in making interest payments.

West Point Acquisition also said it had been negotiating with its lenders, a consortium of banks led by Wells Fargo & Co. and Bankers Trust Co. apparently in hopes of restructuring the $796-million loan they made to the Farley unit last year so it could buy Pepperell stock.

Unless the loan is restructured, analysts said, Farley could be forced into bankruptcy proceedings or be obliged to sell assets, possibly including Fruit of the Loom Inc., the country’s biggest underwear manufacturer.

West Point Acquisition said the defaults would not affect West Point-Pepperell, which continues to trade as a public company on the New York Stock Exchange although the Farley unit owns about 95% of its stock.