Bondholders step into control of Cherokee via debt-equity swap.

Exchanging their IOUs for equity, bondholders last week took control of Sunland-based Cherokee Inc., the financially struggling national apparel manufacturer.

Sunk by junk, Cherokee could not honor interest payments on $140.8 million of debt, mostly high-yield bonds underwritten four years ago by now-defunct Drexel Burnham Lambert Inc.

"The company was spending a lot on interest," said Paul Aronzon, attorney with the Los Angeles offices of Milbank, Tweed, Hadley & McCloy, who represented Cherokee in working out the deal. "They (Cherokee) had to focus on their core businesses."

The $194.9 million (annual sales) Cherokee sells nationwide through 10,500 retail locations and advertises heavily to young people, primarily women.

Chains such as Mervyn's, Wal-Mart, J.C. Penney and Bon Marche carry the Cherokee line, but the retailers, particularly Mervyn's, have been buying far less of the Cherokee brand than they did last year.

For example, in fiscal 1992 ended May 30, Cherokee sales fell by 17.7 percent from the 1991 level of $236.9 million. Orders from Mervyn's, the biggest customer, fell to $25 million from $50 million.

With sagging sales but huge debts, Cherokee became a money-loser, running $5.69 million of red ink in fiscal 1992 and losing another $4.28 million in fiscal first quarter 1993, ended Aug. 29, on sales of $41.0 million.

Like many other companies in the 1980s, Cherokee loaded up on debt in a leveraged buyout -- but when the 1990s economy hit, debt payments became a burden. In fiscal 1992, Cherokee had interest expenses of $23.5 million, although $8.7 million of that was non-cash amortization expenses. But excluding debt, Cherokee is virtually a break-even operation.

The Cherokee leveraged buyout was led in 1988 by Westside financier Jeffrey Deutschman, 35, of the investment firm Deutschman Clayton, and financed by former junk-bond king Michael Milken's operation at Drexel Burnham Lambert.

After the buyout, partnerships organized by Drexel took a 70 percent equity stake in Cherokee. In previous interviews with the Business Journal, Deutschman declined to identify who was in the controlling partnerships.

The founder of the 20-year-old Cherokee, James Argyropoulos, was pushed out in the leveraged buyout, which resulted in a bitter lawsuit.

Deutschman and Robert Margolis, former Cherokee president, took operational control of the garment-maker after the buyout.

Largely shorn of debt, Cherokee should be a tough competitor in the rest of the 1990s, said Margolis said last week.

A bit ironically, Leon Black, former merger and acquisition top-gun at Drexel Burnham Lambert, is now likely a major player at Cherokee.

A major bondholder of Cherokee was the Executive Life Insurance Co., part of the Los Angeles-based First Executive Corp.

Executive Life's assets were acquired this year by the French company Altus Finance. Black leads the New York-based Apollo Advisers, which advises Altus on its Executive Life assets.

The role of financier Deutschman, now Cherokee co-chairman with Margolis, was unclear last week. Lawyer Aronzon said the composition of the Cherokee board was "under review."