Control of Cherokee Will Shift in Debt Agreement

Control of Cherokee Inc. would shift to certain of the Sunland company’s debt holders from an investor group under a tentative debt-restructuring agreement announced by the ailing apparel maker.

Cherokee is struggling under the weight of $163 million of debt, most of which is in expensive “junk bonds” held mainly by institutional investors.

The company missed an $8.2-million interest payment on the bonds, formally known as senior subordinated reset notes, that was due Nov. 1.

Under the agreement in principle, that payment would not have to be made.

The agreement also calls for holders of the notes to swap their securities for about $52.5 million in new notes and an undisclosed majority of Cherokee’s common stock. The investor group, led by Cherokee co-chairmen Jeffrey S. Deutschman and Robert Margolis, now has a 67% stake in the company.

Deutschman is a Santa Monica investor and Margolis is Cherokee’s chief executive.

Cherokee said the restructuring agreement also “contemplates” that holders of Cherokee’s other debt securities and preferred stock also will agree to exchange their holdings for company stock. The agreement is subject to approval by Cherokee’s banks and other conditions.

Cherokee incurred the debt when the Deutschman/Margolis group bought the company in a leveraged buyout three years ago. Cherokee was able to support the debt until this year, when the weak retail market slowed the company’s sales.