<PAGE>
 
                                                                [Execution Copy]
 

                                AMENDMENT NO. 2


          AMENDMENT NO. 2 dated as of January 29, 1998, between Polymer Group,
Inc. ("PGI"); each of the other "Borrowers" identified under the caption
       ---                                                              
"BORROWERS" on the signature pages hereto, each of the Domestic Non-Borrower
Guarantors identified under the caption "DOMESTIC NON-BORROWER GUARANTORS" on
the signature pages hereto; each of the lenders that is a signatory hereto
identified under the caption "LENDERS" on the signature pages hereto; and THE
CHASE MANHATTAN BANK, as administrative agent for the Lenders (in such capacity,
together with its successors in such capacity, the "Administrative Agent").
                                                    --------------------   

          PGI, the other Borrowers, the Domestic Non-Borrower Guarantors, the
Lenders referred to therein and the Administrative Agent are parties to a Second
Amended, Restated and Consolidated Credit Agreement dated as of July 3, 1997 (as
heretofore amended, the "Credit Agreement"), providing for the Lenders to extend
                         ----------------                                       
credit (by way of revolving credit loans and letters of credit) to the Borrowers
in U.S. Dollars and in certain Alternative Currencies in an amount at any time
not exceeding U.S. $325,000,000.  PGI has now requested that the Lenders extend
additional credit to PGI by way of a single-draw term loan facility in U.S.
Dollars in the amount of U.S. $125,000,000 to be used by PGI to partially
finance the acquisition of assets related to the nonwovens fabric business of
Dominion Textile Inc. following consummation of the Tender Offer referred to
below.  PGI, the other Borrowers, the Domestic Non-Borrower Guarantors, the
Lenders and the Administrative Agent wish to amend the Credit Agreement in order
to provide for such additional credit and in certain other respects, and,
accordingly, the parties hereto hereby agree as follows:

          Section 1.  Definitions.  Except as otherwise defined in this
                      -----------                                      
Amendment No. 2, terms defined in the Credit Agreement are used herein as
defined therein.

          Section 2.  Amendments.  Subject to the satisfaction of the condition
                      ----------                                               
precedent specified in Section 5 below, but effective as of the date hereof, the
Credit Agreement shall be amended as follows:

          A.  Preamble.  The fourth paragraph in the preamble to the Credit
              --------                                                     
Agreement shall be amended by replacing the amount "U.S. $325,000,000" with the
amount "U.S. $450,000,000".

          B.  New Definitions.  Section 1.01 of the Credit Agreement shall be
              ---------------                                                
amended by inserting in their entireties the following definitions in the
appropriate alphabetical order:

          "Administrative Questionnaire" means, with respect to each Lender, an
           ----------------------------                                        
     administrative questionnaire in the form prepared by the Administrative
     Agent and 

                                Amendment No. 2
                                ---------------
<PAGE>
 
                                      -2-

     submitted to the Administrative Agent (with a copy to the Borrowers) duly
     completed by such Lender.

          "Applicable Revolving Credit Commitment Amount" shall mean, initially,
           ---------------------------------------------                        
     U.S. $325,000,000, and thereafter, on any date, the aggregate amount to
     which the Revolving Credit Commitments have been reduced hereunder pursuant
     to Section 2.04 or 2.10 hereof.

          "Apparel Business" shall have the meaning assigned to the term
           ----------------                                             
     "Apparel Fabrics Business" in the Master Separation Agreement.

          "BidCo" shall mean DT Acquisition Inc., a corporation incorporated
           -----                                                            
     under the Canada Business Corporations Act and a Subsidiary of PGI.

          "BidCo Credit Agreement" shall mean the U.S. $600,000,000 Credit
           ----------------------                                         
     Agreement dated as of December 17, 1997 between BidCo, the other
     "Borrowers" named therein, the lenders named therein, The Chase Manhattan
     Bank, as Administrative Agent, and First Union National Bank, as
     Documentation Agent.

          "DIFCO Business" shall have the meaning assigned to such term in the
           --------------                                                     
     Master Separation Agreement.

          "DomTex" shall mean Dominion Textile Inc., a corporation incorporated
           ------                                                              
     under the Canada Business Corporations Act.

          "Majority Term B Loan Lenders" shall mean Term B Loan Lenders holding
           ----------------------------                                        
     at least 51% of the aggregate outstanding principal amount of the Term B
     Loans or, prior to the Term B Loan Closing Date, at least 51% of the Term B
     Loan Commitments.

          "Master Separation Agreement" shall mean the Master Separation
           ---------------------------                                  
     Agreement dated as of January 29, 1998 among PGI, Galey & Lord
     Incorporated, BidCo, DomTex, Dominion Textile International (Asia) Pte.,
     Ltd., Dominion Textile International B.V. and Dominion Textile (USA) Inc.,
     in substantially the form of the draft dated January 23, 1998, as the same
     shall, subject to Section 9.14 hereof, be modified and supplemented and in
     effect from time to time.

          "Nonwovens Acquisition" shall mean the purchase or acquisition by PGI
           ---------------------                                               
     of the Nonwovens Business and the DIFCO Business of DomTex, which may be
     effected through a purchase of assets, one or more mergers involving DomTex
     or its Subsidiaries, or through the designation of DomTex and its
     Subsidiaries, after the sale of the Apparel Business, as "Restricted
     Subsidiaries" hereunder and under the Senior Subordinated 

                               Amendment No. 2
                               ---------------
<PAGE>
 
                                      -3-

     Notes, together with, in each case, the satisfaction of the conditions
     precedent set forth in Section 7.03 hereof.

          "Nonwovens Business" shall have the meaning assigned to such term in
           ------------------                                                 
     the Master Separation Agreement.

          "Principal Payment Date" shall mean each day set forth in Section 3.01
           ----------------------                                               
     hereof, provided, that if any such day is not a Business Day, then such
             --------                                                       
     Principal Payment Date shall be the next preceding Business Day.

          "Reduction Date" shall mean each of the following dates:  (i) the
           --------------                                                  
     Quarterly Date falling on or nearest to December 20, 2001, (ii) the
     Quarterly Date falling on or nearest to June 20, 2002, and (iii) the
     Quarterly Date falling on or nearest to December 20, 2002.

          "Resulting Nonwovens Entity" shall have the meaning assigned to such
           --------------------------                                         
     term in Section 7.03(a) hereof.

          "Revolving Credit Commitments" shall mean, collectively, the Facility
           ----------------------------                                        
     A Revolving Credit Commitments and the Facility B Revolving Credit
     Commitments.

          "Revolving Credit Loans" shall mean, collectively, the Facility A
           ----------------------                                          
     Revolving Credit Loans and the Facility B Revolving Credit Loans.

          "Tender Offer" shall mean the offer made by BidCo for all of the
           ------------                                                   
     issued and outstanding shares of DomTex pursuant to an Offering Circular
     sponsored by BidCo on October 29, 1997, a Notice of Extension and Variation
     on November 18, 1997, a Notice of Extension and Variation on December 2,
     1997, and a Notice of Extension and Variation on December 8, 1997.

          "Term B Loans" shall mean the loans provided for by Section 2.01(c)
           ------------                                                      
     hereof, which may be Base Rate Loans and/or Eurocurrency Loans.

          "Term B Loans (Base Rate)" shall mean Term B Loans that are Base Rate
           ------------------------                                            
     Loans.

          "Term B Loan Closing Date" shall mean the date on which the Term B
           ------------------------                                         
     Loans are made to PGI hereunder, which date may be no earlier than the Term
     B Loan Effective Date and no later than the Term B Loan Commitment
     Termination Date.

          "Term B Loan Commitment" shall mean, for each Term B Loan Lender, the
           ----------------------                                              
     obligation of such Lender to make a Term B Loan to PGI on the Term B Loan
     Closing Date in U.S. Dollars in an amount up to but not exceeding the
     amount set opposite the 

                                Amendment No. 2
                                ---------------
<PAGE>
 
                                      -4-

     name of such Lender on Schedule XI hereof or, in the case of any Person
     that becomes a Term B Loan Lender pursuant to an assignment permitted under
     Section 12.06(b) hereof, as specified in the respective instrument of
     assignment pursuant to which such assignment is effected (as the same may
     be reduced from time to time pursuant to Section 2.04 hereof). The original
     aggregate principal amount of the Term B Loan Commitments is U.S.
     $125,000,000.

          "Term B Loan Commitment Termination Date" shall mean the earlier of
           ---------------------------------------                           
     (a) the date 364 days after the Tender Loan Closing Date under and as
     defined in the BidCo Credit Agreement and (b) the date 180 days after the
     date the Amalgamation Closing Date under and as defined in the BidCo Credit
     Agreement.

          "Term B Loan Effective Date" shall mean the date on which each of the
           --------------------------                                          
     conditions precedent to the making of the Term B Loans specified in
     Sections 7.02 and 7.03 hereof shall have been satisfied or waived.

          "Term B Loans (Eurocurrency)" shall mean Term B Loans that are
           ---------------------------                                  
     Eurocurrency Loans.

          "Term B Loan Lenders" shall mean (a) on the date hereof, the Lenders
           -------------------                                                
     having Term B Loan Commitments on Schedule XI hereof and (b) thereafter,
     the Lenders from time to time holding Term B Loans and Term B Loan
     Commitments after giving effect to any assignments thereof permitted by
     Section 12.06 hereof.

          "Term B Loan Notes" shall mean the promissory notes provided for by
           -----------------                                                 
     Section 2.08(c) hereof and all promissory notes delivered in substitution
     or exchange therefor, in each case as the same shall be modified and
     supplemented and in effect from time to time.

     C.  Revisions to Existing Definitions.  Section 1.01 of the Credit
         ---------------------------------                             
Agreement shall be amended by amending the following definitions as follows:

               (i)  The definition of "Applicable Lending Office" shall be
                                       -------------------------          
     deleted in its entirety and replaced with the following:

               "Applicable Lending Office" shall mean, for each Lender and for
                -------------------------                                     
          each Type and Currency of Loan, the "Lending Office" of such Lender
          (or of an affiliate of such Lender) designated in the Administrative
          Questionnaire for such Type and Currency of Loan or such other office
          of such Lender (or of an affiliate of such Lender) as such Lender may
          from time to time specify to the 

                                Amendment No. 2
                                ---------------
<PAGE>
 
                                      -5-



          Administrative Agent and the Borrowers as the office by which Loans of
          such Type and Currency are to be made and maintained.

          (ii)   The definition of "Applicable Margin" shall be amended by
                                    -----------------                     
     deleting the first sentence (including the grid) in its entirety and
     replacing it with the following:

               "Applicable Margin" shall mean with respect to Eurocurrency Loans
                -----------------                                               
          (except for Term B Loans (Eurocurrency)), Base Rate Loans (except for
          Term B Loans (Base Rate)), Canadian Base Rate Loans, letter of credit
          fees (as such term is used in Section 2.03(g) hereof), commitment fees
          (as such term is used in Section 2.05 hereof), Term B Loans
          (Eurocurrency) and Term B Loans (Base Rate) during any Accrual Period
          (as defined below), the respective rates set forth below for such
          Loans and such fees for such Accrual Period, which rates shall be
          based upon the Leverage Ratio for such Accrual Period:

<TABLE>
<CAPTION>
                              Base Rate                                                  
                              Loans and       Letter of                                            
Leverage     Eurocurrency   Canadian Base       Credit       Commitment    Term B Loans   Term B Loans 
  Ratio          Loans        Rate Loans         Fees           Fees      (Eurocurrency)   (Base Rate) 
---------    -------------  --------------  ---------------  -----------  --------------  ------------- 
<S>          <C>            <C>             <C>              <C>          <C>             <C>             
Greater than
or equal to
4.50              2.25%          1.00%           2.25%             .50%        2.50%           1.25%
 
Greater than
or equal to
4.25 but less
than 4.50         1.75%           .50%           1.75%            .375%        2.25%           1.00%
 
Greater than
or equal to
3.75 but less 
than 4.25         1.50%           .25%           1.50%            .375%        2.00%            .75%
 
Greater than
or equal to
3.00 but less 
than 3.75         1.25%             0%           1.25%             .30%        2.00%            .75%
 
Greater than
or equal to
2.50 but less
than 3.00         1.00%             0%           1.00%             .25%        2.00%            .75%
 
Less than
2.50               .75%             0%            .75%             .20%        2.00%            .75%
</TABLE>

                                Amendment No. 2
                                ---------------
<PAGE>
 
                                      -6-

          (iii)  The definition of "Applicable Margin" shall be further amended 
                                    -----------------                  
     by deleting the last paragraph in its entirety and replacing it with the
     following:

               "Anything in this Agreement to the contrary notwithstanding, the
          Applicable Margin shall be the highest applicable rate provided for
          above (i.e., 2.25% for Eurocurrency Loans (except for Term B Loans
          (Eurocurrency)), 1.00% for Base Rate Loans (except for Term B Loans
          (Base Rate)) and Canadian Base Rate Loans, 2.25% for letter of credit
          fees, .50% for commitment fees, 2.50% for Term B Loans (Eurocurrency)
          and 1.25% for Term B Loans (Base Rate)) (i) during any period when an
          Event of Default shall have occurred and be continuing or (ii) if the
          Obligors shall default in the delivery of any financial statements
          pursuant to Section 9.01(a) or 9.01(b) hereof, or in the delivery of
          the certificate of a senior financial officer pursuant to Section
          9.05(d)(iv)(z)".

          (iv)   The definition of "Commitments" shall be deleted in its
                                    -----------                         
     entirety and replaced with the following:

               "Commitments" shall mean the Facility A Revolving Credit
                -----------                                            
          Commitments, the Facility B Revolving Credit Commitments and the Term
          B Loan Commitments.

          (v)    The definition of "Fixed Charges Ratio" shall be deleted in
                                    -------------------                     
     its entirety and replaced with the following:

               "Fixed Charges Ratio" shall mean, as at any date, the ratio of
                -------------------                                          
          (a) EBITDA for the period of four fiscal quarters ending on or most
          recently ended prior to such date minus Capital Expenditures for such
                                            -----                              
          period (except that for any period ending on or before the fiscal year
          ending on or nearest to December 31, 1998, only the portion of Capital
          Expenditures for the relevant period in excess of U.S. $40,000,000
          shall be so subtracted) to (b) Debt Service for such period.

          (vi)   The definition of "Facility A Revolving Credit Commitment"
                                    -------------------------------------- 
     shall be deleted in its entirety and replaced with the following:

               "Facility A Revolving Credit Commitment" shall mean, for each
                --------------------------------------                      
          Facility A Revolving Credit Lender, the obligation of such Lender to
          make Facility A Revolving Credit Loans to the Facility A Revolving
          Credit Borrowers in U.S. Dollars (in the case of PGI) and Dutch
          Guilders (in the case of the Dutch Borrowers) in an aggregate amount
          at any one time outstanding up to but not exceeding the amount set
          opposite the name of such Lender on the signature pages hereof (or,
          from and after the Term B Loan Closing Date, on Schedule IX 

                                Amendment No. 2
                                ---------------
<PAGE>
 
                                      -7-

          hereto) under the caption "Facility A Revolving Credit Commitment" (as
          the same may be reduced from time to time pursuant to Section 2.04
          hereof) or, in the case of any Person that becomes a Facility A
          Revolving Credit Lender pursuant to an assignment permitted under
          Section 12.06(b) hereof, as specified in the respective instrument of
          assignment pursuant to which such assignment is effected (as the same
          may be reduced from time to time pursuant to Section 2.04 hereof).
          The original aggregate principal amount of the Facility A Revolving
          Credit Commitments on the Effective Date is U.S. $295,000,000;
          provided that, on any Test Date (after giving effect to the
          --------                                                   
          calculations required to be performed on such Test Date in accordance
          with Section 2.10(g) hereof) the aggregate Revolving Credit Exposure
          shall not exceed the Applicable Revolving Credit Commitment Amount.

          (vii)  The definition of "Facility A Revolving Credit Lenders" shall
                                    ----------------------------------- 
     be deleted in its entirety and replaced with the following:

               "Facility A Revolving Credit Lenders" shall mean (a) on the date
                -----------------------------------                            
          hereof, the Lenders having Facility A Revolving Credit Commitments on
          the signature pages hereof (or, from and after the Term B Loan Closing
          Date, on Schedule IX hereto) and (b) thereafter, the Lenders from time
          to time holding Facility A Revolving Credit Loans and Facility A
          Revolving Credit Commitments after giving effect to any assignments
          thereof permitted by Section 12.06 hereof.

          (viii) The definition of "Facility B Revolving Credit Commitment"
                                    --------------------------------------
     shall be deleted in its entirety and replaced with the following:

               "Facility B Revolving Credit Commitment" shall mean, for each
                --------------------------------------                      
          Facility B Revolving Credit Lender, the obligation of such Lender to
          make Facility B Revolving Credit Loans to Fabrene in Canadian Dollars
          in an aggregate amount at any one time outstanding up to but not
          exceeding the amount set opposite the name of such Lender on the
          signature pages hereof (or, from and after the Term B Loan Closing
          Date, on Schedule X hereto) under the caption "Facility B Revolving
          Credit Commitment" (as the same may be reduced from time to time
          pursuant to Section 2.04 hereof) or, in the case of any Person that
          becomes a Facility B Revolving Credit Lender pursuant to an assignment
          permitted under Section 12.06(b) hereof, as specified in the
          respective instrument of assignment pursuant to which such assignment
          is effected (as the same may be reduced from time to time pursuant to
          Section 2.04 hereof).  The original aggregate principal amount of the
          Facility B Revolving Credit Commitments is the Foreign Currency
          Equivalent in Canadian Dollars on the Effective Date of U.S.
          $30,000,000; provided that, on any Test Date (after giving effect to
                       --------                                               
          the calculations required to 

                                Amendment No. 2
                                ---------------
<PAGE>
 
                                      -8-

          be performed on such Test Date in accordance with Section 2.10(g)
          hereof) the aggregate Revolving Credit Exposure shall not exceed the
          Applicable Revolving Credit Commitment Amount.

          (ix)   The definition of "Facility B Revolving Credit Lenders" shall
                                    ----------------------------------- 
     be deleted in its entirety and replaced with the following:

               "Facility B Revolving Credit Lenders" shall mean (a) on the date
                -----------------------------------                            
          hereof, the Lenders having Facility B Revolving Credit Commitments on
          the signature pages hereof (or, from and after the Term B Loan Closing
          Date, on Schedule X hereto) and (b) thereafter, the Lenders from time
          to time holding Facility B Revolving Credit Loans and Facility B
          Revolving Credit Commitments after giving effect to any assignments
          thereof permitted by Section 12.06 hereof.

          (x)    The definition of "Interest Period" shall be deleted in its
                                    ---------------                         
     entirety and replaced with the following:

               "Interest Period" shall mean, with respect to any Eurocurrency
                ---------------                                              
          Loan, each period commencing on the date such Eurocurrency Loan is
          made or Converted from a Base Rate Loan or the last day of the next
          preceding Interest Period for such Loan and ending on the numerically
          corresponding day in the first, third or sixth (or, subject to the
          agreement of each Lender participating in such Loan in its sole
          discretion, twelfth) calendar month thereafter, as the Borrowers may
          select as provided in Section 4.05 hereof, except that each Interest
          Period that commences on the last Business Day of a calendar month (or
          on any day for which there is no numerically corresponding day in the
          appropriate subsequent calendar month) shall end on the last Business
          Day of the appropriate subsequent calendar month.  Notwithstanding the
          foregoing:

                    (i)    if any Interest Period for any Revolving Credit
               Loan would otherwise end after the Revolving Credit Termination
               Date, such Interest Period shall end on the Revolving Credit
               Termination Date;

                    (ii)   no Interest Period for any Facility A Revolving
               Credit Loan may commence before and end after any Reduction Date
               unless, after giving effect thereto, the aggregate principal
               amount of the Facility A Revolving Credit Loans having Interest
               Periods that end after such Reduction Date shall be equal to or
               less than the aggregate amount of the Facility A Revolving Credit
               Commitments on such Reduction Date;

                                Amendment No. 2
                                ---------------
<PAGE>
 
                                      -9-

                    (iii)  no Interest Period for any Term B Loan may commence
               before and end after any Principal Payment Date applicable
               thereto unless, after giving effect thereto, the aggregate
               principal amount of the Term B Loans having Interest Periods that
               end after such Principal Payment Date shall be equal to or less
               than the aggregate principal amount of the Term B Loans scheduled
               to be outstanding after giving effect to the payments of
               principal required to be made on such Principal Payment Date;

                    (iv)   each Interest Period that would otherwise end on a
               day which is not a Business Day shall end on the next succeeding
               Business Day (or, if such next succeeding Business Day falls in
               the next succeeding calendar month, on the next preceding
               Business Day); and

                    (v)    notwithstanding clauses (i), (ii) and (iii) above,
               no Interest Period shall have a duration of less than one month
               and, if the Interest Period for any Loan would otherwise be a
               shorter period, such Loan shall not be available hereunder for
               such period.

          (xi)   The definition of "Lenders" shall be deleted in its entirety
                                    -------
     and replaced with the following:

               "Lenders" shall mean, collectively, the Facility A Revolving
                -------                                                    
          Credit Lenders, the Facility B Revolving Credit Lenders and the Term B
          Loan Lenders.

          (xii)  The definition of "Loans" shall be deleted in its entirety
                                    -----                                  
     and replaced with the following:

               "Loans" shall mean, collectively, the Facility A Revolving Credit
                -----                                                           
          Loans, the Facility B Revolving Credit Loans and the Term B Loans.

          (xiii) The definition of "Notes" shall be deleted in its entirety and
                                    -----
     replaced with the following:

               "Notes" shall mean, collectively, the Facility A Revolving Credit
                -----                                                           
          Notes, the Facility B Revolving Credit Notes and the Term B Loan
          Notes.

          (ix)   The definition of "Revolving Credit Exposure" shall be deleted
                                    -------------------------
     in its entirety and replaced with the following:

               "Revolving Credit Exposure" shall mean, on any date, the sum of
                -------------------------                                     
          (a) the aggregate principal amount of all Revolving Credit Loans
          denominated in U.S. 

                                Amendment No. 2
                                ---------------
<PAGE>
 
                                      -10-

          Dollars outstanding on such date plus (b) the aggregate U.S. Dollar
                                           ----
          Equivalent of the principal amount of all Revolving Credit Loans
          denominated in Alternative Currencies outstanding on such date plus
                                                                         ----
          (c) the aggregate amount of Letter of Credit Liabilities outstanding
          on such date.

          D.  Classes of Loans.  Section 1.03 of the Credit Agreement shall be
              ----------------                                                
deleted in its entirety and replaced with the following:

          "1.03  Classes, Types and Currencies of Loans.  Loans hereunder are
                 --------------------------------------                      
     distinguished by "Class", "Type" and "Currency".  The "Class" of a Loan (or
     of a Commitment to make a Loan) refers to whether such Loan is a Facility A
     Revolving Credit Loan or a Facility B Revolving Credit Loan or a Term B
     Loan, each of which constitutes a Class.  The "Type" of a Loan as used in
     connection with U.S. Dollar-denominated Loans refers to whether such Loan
     is a Base Rate Loan or a Eurodollar Loan, each of which constitutes a Type,
     and, as used in connection with Canadian Dollar-denominated Loans refers to
     whether such Loan is a Canadian Base Rate Loan or a Bankers' Acceptance
     Loan, each of which constitutes a Type.  The "Currency" of a Loan refers to
     whether such Loan is to be made in U.S. Dollars, Dutch Guilders or Canadian
     Dollars, each of which constitutes a "Currency".  Loans may be identified
     by Class, Type and Currency."

          E.  Loans.  Section 2.01 of the Credit Agreement shall be amended as
              -----                                                           
follows:

          (i)    Clause (A) of Section 2.01(c) of the Credit Agreement shall be
     amended by deleting the reference therein to "U.S. $325,000,000" and
     inserting "Applicable Revolving Credit Commitment Amount" in lieu thereof.

          (ii)   Section 2.01 of the Credit Agreement shall be further amended
     by relettering paragraphs (c) and (d) thereof, as paragraph (d) and (e),
     respectively, and inserting a new paragraph (c) as follows:

               "(c)  Term B Loans.  Each Term B Loan Lender severally agrees, on
                     ------------                                               
          the terms and conditions of this Agreement, to make loans to PGI on
          the Term B Loan Closing Date in U.S. Dollars in an aggregate principal
          amount up to but not exceeding such Lender's Term B Loan Commitment as
          then in effect.  After the Term B Loan Closing Date, and subject to
          the terms and conditions of this Agreement, PGI may Convert Term B
          Loans of one Type into Term B Loans of another Type (as provided in
          Section 2.09 hereof) or Continue Term B Loans of one Type as Term B
          Loans of the same Type (as provided in Section 2.09 hereof).  Proceeds
          of Term B Loans shall be available for any use permitted under Section
          9.13 hereof."

                                Amendment No. 2
                                ---------------
<PAGE>
 
                                      -11-

          (iii)  Section 2.01 of the Credit Agreement shall be further amended
     by adding the following new paragraph (f):

               "(f)  Treatment of Loans Outstanding under Credit Agreement.  In
                     -----------------------------------------------------     
          the event that any loans under the Credit Agreement shall remain
          outstanding on the Term B Loan Closing Date, then such loans shall be
          continued (with new Interest Periods) as Facility A Revolving Credit
          or Facility B Revolving Credit Loans (as applicable) hereunder after
          such date, in the corresponding currency in which outstanding under
          the Credit Agreement prior to such date and the Lenders hereunder
          shall, on the Term B Loan Closing Date, take such actions, and make
          such adjustments among themselves, as shall be necessary so that such
          loans are held hereunder pro rata in accordance with their respective
          Facility A Revolving Credit Commitments and Facility B Revolving
          Credit Commitments, as applicable, as such Commitments are set forth
          on Schedules IX and X hereto, respectively.  On the Term B Loan
          Closing Date, PGI shall cause to be paid to each Lender party to the
          Credit Agreement, all amounts that would be owing to such Lender under
          Section 5.05 of the Credit Agreement as if the "Loans" of such Lender
          under the Credit Agreement were being repaid on the Term B Loan
          Closing Date, whether or not any such loans are actually repaid on
          such date."

          F.  Borrowings.  Section 2.02 of the Credit Agreement shall be amended
              ----------                                                        
by adding after the words "Facility B Revolving Credit Lender" in the second
sentence thereof the following:  "or Term B Loan Lender".

          G.  Reduction of Commitments.  Section 2.04 of the Credit Agreement
              ------------------------                                       
shall be amended by deleting Section 2.04(a) of the Credit Agreement in its
entirety and replacing it with the following:

               "(a)  The aggregate amount of the Facility A and Facility B
          Revolving Credit Commitments shall be automatically reduced to zero on
          the Revolving Credit Termination Date. The Term B Loan Commitments
          shall be automatically terminated on the earlier of (i) the Term B
          Loan Closing Date (following the making of the loans under Section
          2.01(c) hereof to be made on such Date) and (ii) the Term B Loan
          Commitment Termination Date.

               The aggregate amount of the Facility A Revolving Credit
          Commitments (to the extent not previously reduced) shall be
          automatically reduced on each Reduction Date set forth below to the
          amount set forth opposite the Reduction Date set forth below:

                                Amendment No. 2
                                ---------------
<PAGE>
 
                                      -12-

<TABLE>
<CAPTION>
                                                 Facility A
               Reduction Date                  Reduced Amount
               --------------                  --------------          
               <S>                             <C> 
               December 20, 2001               U.S. $270,000,000
               June 20, 2002                   U.S. $245,000,000
               December 20, 2002               U.S. $220,000,000
</TABLE>

          Upon any such reduction, PGI shall make any necessary prepayments in
          order that the aggregate outstanding principal amount of the Facility
          A Revolving Credit Loans shall not exceed the then-outstanding amount
          of the Facility A Revolving Credit Commitments, such prepayments to be
          applied first to Facility A Revolving Credit Loans denominated in U.S.
                  -----                                                         
          Dollars, and second to Facility A Revolving Credit Loans denominated
                       ------                                                 
          in Dutch Guilders."

          H.  Commitment Fee.  (i)  Section 2.05 of the Credit Agreement shall
              --------------                                                  
be amended by adding the following after the words "Effective Date" in the first
sentence thereof:  "(and the Term B Loan Closing Date)"

          (ii)  Section 2.05 of the Credit Agreement shall be further amended by
adding the following at the end thereof:

     "Notwithstanding anything herein to the contrary, PGI shall pay to the
     Administrative Agent for account of each Term B Loan Lender, a commitment
     fee on the daily average unused amount of such Lender's Term B Loan
     Commitment for the period from and including the date of Amendment No. 2
     hereto to but not including the earlier of the Term B Loan Closing Date and
     the Term B Loan Commitment Termination Date at a rate per annum equal to
     .50%.  Such fees shall be payable in arrears in U.S. Dollars on each
     Quarterly Date and on the earlier of the Term B Loan Closing Date and the
     Term B Loan Commitment Termination Date".

          I.  Notes.  (i) Section 2.08 of the Credit Agreement shall be amended
              -----                                                            
by deleting paragraphs (a) and (b) in their entireties and replacing them with
the following:

          "(a)  The Facility A Revolving Credit Loans made by each Facility A
     Revolving Credit Lender to each Facility A Revolving Credit Borrower shall
     be evidenced, (i) from the date hereof until the Term B Loan Closing Date,
     by a single promissory note of each Facility A Revolving Credit Borrower
     substantially in the form of Exhibit A-1 hereto, dated the date hereof, and
     (ii) from and after the Term B Loan Closing Date, by a single promissory
     note of each Facility A Revolving Credit Borrower substantially in the form
     of Exhibit A-1 hereto, dated the Term B Loan Closing Date, in each case
     payable to such 

                                Amendment No. 2
                                ---------------
<PAGE>
 
                                      -13-

     Lender in a principal amount equal (x) in the case of notes issued pursuant
     to clause (i) above, to the amount of its Facility A Revolving Credit
     Commitment as originally in effect on the date hereof (or, in the case of
     either Dutch Borrower, in the amount of the Facility A Revolving Credit
     Loans made to it) and otherwise duly completed and (y) in the case of notes
     issued pursuant to clause (ii) above, to the amount of its Facility A
     Revolving Credit Commitment as originally in effect on the Term B Loan
     Closing Date (or, in the case of either Dutch Borrower, in the amount of
     the Facility A Revolving Credit Loans made to it) and otherwise duly
     completed.

          (b)  The Facility B Revolving Credit Loans made by each Facility B
     Revolving Credit Lender to Fabrene shall be evidenced, (i) from the date
     hereof until the Term B Loan Closing Date, by a single promissory note of
     Fabrene substantially in the form of Exhibit A-2 hereto, dated the date
     hereof, and (ii) from and after the Term B Loan Closing Date, by a single
     promissory note of Fabrene substantially in the form of Exhibit A-2 hereto,
     dated the Term B Loan Closing Date, in each case payable to such Lender in
     a principal amount equal to the amount of the Facility B Revolving Credit
     Loans made to it and otherwise duly completed."

          (ii)   Section 2.08 of the Credit Agreement shall be further amended
by relettering paragraphs (c) and (d) thereof, as paragraph (d) and (e),
respectively, and inserting a new paragraph (c) as follows:

          "(c) The Term B Loan made by each Term B Loan Lender to PGI shall be
     evidenced by a single promissory note of PGI, substantially in the form of
     Exhibit A-3 hereto, dated the date hereof, payable to such Lender in a
     principal amount equal to the amount of its Term B Loan Commitment as
     originally in effect, and otherwise duly completed."

          J.   Prepayments.  Section 2.10 of the Credit Agreement shall be
               -----------                                                
amended by deleting paragraph (e) in its entirety and replacing it with the
following:

          (e)  Application.  Prepayments and reductions of Commitments described
               -----------                                                      
     in the above paragraphs of this Section 2.10 shall be effected as follows:

               "(i)  in the case of paragraphs (a), (c) and (d) above, the
          amount of the required prepayment and reduction shall be apportioned
          between the Term B Loans and the Revolving Credit Loans (and Letter of
          Credit Liabilities) ratably in accordance with the respective then-
          outstanding aggregate principal amounts of the Term B Loans and the
          Revolving Credit Commitments with the amounts so apportioned to be
          applied to the prepayment of the respective Loans of each such Class
          (and to provide cover for Letter of Credit Liabilities and to the
          reduction of 

                                Amendment No. 2
                                ---------------
<PAGE>
 
                                      -14-

          Revolving Credit Commitments), such reductions of Revolving Credit
          Commitments, and prepayments of the Revolving Credit Loans, to be
          applied first to the reduction of Facility A Revolving Credit
                  -----
          Commitments (and to the prepayment first of Facility A Revolving
          Credit Loans denominated in U.S. Dollars, second to the prepayment of
          Facility A Revolving Credit Loans denominated in Dutch Guilders and
          third to provide cover for Letter of Credit Liabilities), and second,
                                                                        ------ 
          after all outstanding Facility A Revolving Credit Commitments have
          been reduced to zero (and all Facility A Revolving Credit Loans paid
          in full and cover for all Letter of Credit Liabilities provided), to
          the reduction of Facility B Revolving Credit Commitments (and to the
          prepayment of Facility B Revolving Credit Loans), provided that to the
                                                            --------
          extent any such required reduction of Revolving Credit Commitments
          shall exceed the then-outstanding aggregate principal amount of
          Revolving Credit Loans (and Letter of Credit Liabilities), such excess
          shall be applied to the prepayment of Term B Loans, and

               (ii)   in the case of paragraph (b) above, the amount of the
          required prepayment and reduction shall be apportioned between the
          Term B Loans and the Revolving Credit Loans (and Letter of Credit
          Liabilities) ratably in accordance with the respective then-
          outstanding aggregate principal amounts of the Term B Loans and the
          Revolving Credit Commitments with the amounts so apportioned to be
          applied to the prepayment of the Term B Loans and to the prepayment of
          the Revolving Credit Loans (to provide cover for Letter of Credit
          Liabilities), but not to the reduction of the Revolving Credit
          Commitments, such prepayments to the Revolving Credit Loans to be
          applied first to Facility A Revolving Credit Loans denominated in U.S.
                  -----                                                         
          Dollars, second to Facility A Revolving Credit Loans denominated in
                   ------                                                    
          Dutch Guilders, third to the provision of cover for Letter of Credit
                          -----                                               
          Liabilities and fourth to Facility B Revolving Credit Loans.
                          ------                                      

     Notwithstanding anything herein to the contrary, any Term B Loan Lender
     shall have the option to forego a prepayment of any Term B Loan at its sole
     discretion, and in any such case, the amount of any such foregone
     prepayment will be applied pro rata to the outstanding Term B Loans of the
     Term B Loan Lenders who have not foregone such prepayment; provided, in the
                                                                --------        
     event that, with respect to any such prepayment, each Term B Loan Lender
     shall forego such prepayment, the amount of such foregone prepayment will
     be applied pro rata to the outstanding Revolving Credit Loans (and Letter
     of Credit Liabilities) of the Revolving Credit Lenders (and, in the case of
     any such prepayment contemplated by paragraphs (a), (c) or (d) above, to
     the reduction of the Revolving Credit Commitments), all in accordance with
     and subject to the priorities set forth in clauses (i) and (ii) above."

                                Amendment No. 2
                                ---------------
<PAGE>
 
                                      -15-

          K.  Amortization of Term B Loans.  Section 3.01 of the Credit
              ----------------------------                             
Agreement shall be amended by adding the following new paragraph (c):

          "(c)  PGI hereby promises to pay to the Administrative Agent in U.S.
     Dollars for account of the Term B Loan Lenders the following aggregate
     principal amounts on the following Principal Payment Dates:
 
<TABLE>
<CAPTION>
          Principal Payment Date           Amount of Payment
          ----------------------           -----------------               
          <S>                              <C>  
           June 20, 1998                    U.S. $   500,000
           December 20, 1998                U.S. $   500,000
           
           June 20, 1999                    U.S. $   500,000
           December 20, 1999                U.S. $   500,000
           
           June 20, 2000                    U.S. $   500,000
           December 20, 2000                U.S. $   500,000
           
           June 20, 2001                    U.S. $   500,000
           December 20, 2001                U.S. $   500,000
           
           June 20, 2002                    U.S. $   500,000
           December 20, 2002                U.S. $   500,000
           
           June 20, 2003                    U.S. $   500,000
           December 20, 2003                U.S. $   500,000
           
           June 20, 2004                    U.S. $29,750,000
           December 20, 2004                U.S. $29,750,000
           
           June 20, 2005                    U.S. $29,750,000
           December 20, 2005                U.S. $29,750,000"
</TABLE>

          L.  Limitation of Eurodollar Loans.  Section 5.02 of the Credit
              ------------------------------                             
Agreement shall be amended by deleting Section 5.02(b) in its entirety and
replacing it with the following:

          "(b)  if the related Loans are Facility A Revolving Credit Loans, the
     Majority Facility A Revolving Credit Lenders determine or, if the related
     Loans are Term B Loans, the Majority Term B Loan Lenders determine (in each
     case, which determination shall be conclusive), and notify the
     Administrative Agent that the relevant rates of interest referred to in the
     definition of "Eurocurrency Base Rate" in Section 1.01 hereof upon the

                                Amendment No. 2
                                --------------- 
<PAGE>
 
                                      -16-

     basis of which the rate of interest for Eurodollar Loans for such Interest
     Period is to be determined are not likely to adequately cover the cost to
     such Lenders of making or maintaining Eurodollar Loans for such Interest
     Period;"

          M.  Conditions.  Section 7.02 of the Credit Agreement shall be deleted
              ----------                                                        
in its entirety and replaced with the following:

          "7.02  Initial and Subsequent Extensions of Credit.  The obligation of
                 -------------------------------------------                    
     the Lenders to make any Loan, including, without limitation, the obligation
     to create and discount any Bankers' Acceptance, or otherwise extend any
     credit to the Borrowers upon the occasion of each borrowing or other
     extension of credit hereunder (including the initial borrowing and the
     borrowing to be made on the Term B Loan Closing Date) is subject to the
     further conditions precedent that, both immediately prior to the making of
     such Loan or creation and discount of such Bankers' Acceptance or other
     extension of credit and also after giving effect thereto and to the
     intended use thereof:

               (a)  no Default shall have occurred and be continuing;

               (b)  the representations and warranties made by the Obligors in
          Section 8 hereof, and by each of the Group Members in each of the
          other Basic Documents to which it is a party, shall be true and
          complete on and as of the date of the making of such Loan or other
          extension of credit with the same force and effect as if made on and
          as of such date (or, if any such representation or warranty is
          expressly stated to have been made as of a specific date, as of such
          specific date); and

               (c)  PGI shall not have requested a release of any Collateral as
          contemplated in the German Security Documents.

     Each notice of borrowing or request for the issuance of a Letter of Credit
     by the Borrowers hereunder shall constitute a certification by the
     Borrowers to the effect set forth in the preceding sentence (both as of the
     date of such notice or request and, unless the Borrowers otherwise notify
     the Administrative Agent prior to the date of such borrowing or issuance,
     as of the date of such borrowing or issuance).

          Notwithstanding anything herein to the contrary, for purposes of Loans
     to be made on the Term B Loan Closing Date, any determination to be made
     that there has been no material adverse change in the financial condition,
     operation, business or prospects of PGI and its consolidated Subsidiaries
     taken as a whole from that set forth in the financial statements referred
     to in Section 8.02 hereof shall be made only by the Administrative Agent."

                                Amendment No. 2
                                --------------- 
<PAGE>
 
                                      -17-

          N.  Additional Conditions.  Section 7 of the Credit agreement shall be
              ---------------------                                             
amended by adding the following new Section 7.03:

          "7.03  Term B Loan Closing Date.  Without in any way limiting the
                 ------------------------                                  
     applicability of Section 7.02 hereof, the obligation of each Term B Loan
     Lender to make its Term B Loan on the Term B Loan Closing Date is subject
     to the satisfaction of the following conditions precedent or, as
     applicable, to the receipt by the Administrative Agent of the following
     documents, in each case in a manner in form and substance satisfactory to
     the Administrative Agent:

                 (a)  Consents.  All consents necessary for DomTex and each of
                      --------  
          its Subsidiaries (or, in the event that the Nonwovens Acquisition is
          to be consummated in a manner which involves the assets constituting
          the Nonwovens Business or the DIFCO Business of DomTex being owned or
          held by one or more entities other than DomTex or any of its
          Subsidiaries (each such other entity, a "Resulting Nonwovens Entity"),
                                                   --------------------------
          all consents necessary for the Resulting Nonwovens Entities and each
          of their Subsidiaries) to become "Restricted Subsidiaries" under the
          Senior Subordinated Notes Indenture and the Credit Agreement shall
          have been obtained.

                 (b)  Guarantees; Restricted Subsidiaries. Domestic Non-Borrower
                      -----------------------------------
          Guaranty Agreements shall have been obtained from DomTex and each of
          its Subsidiaries, or, as applicable, from the Resulting Nonwovens
          Entities and each of their Subsidiaries; provided, that the foregoing
                                                   --------                    
          shall only apply in the case of any such entity that is not
          incorporated or otherwise formed under the laws of the United States
          of America or any of its states if the Majority Lenders reasonably
          determine (in consultation with PGI) that such entity may Guarantee
          the obligations hereunder without adverse tax consequences under
          Section 956 of the Code.  DomTex and each of its Subsidiaries, or, as
          applicable, the Resulting Nonwovens Entities and each of their
          Subsidiaries, shall be "Restricted Subsidiaries" under the Senior
          Subordinated Notes Indenture and the Credit Agreement.

                 (c)  Corporate Documents.  Certified copies of the charter and
                      -------------------                                      
          by-laws (or equivalent documents) of each Group Member (including
          DomTex, or, as applicable, the Resulting Nonwovens Entities) and of
          all corporate authority for each Group Member (including, without
          limitation, board of director resolutions and evidence of the
          incumbency of officers) with respect to the execution, delivery and
          performance of such Basic Documents to which such Group Member is or
          is intended to be a party and each other document to be delivered by
          such 

                               Amendment No. 2
                               --------------- 
<PAGE>
 
                                      -18-

          Group Member from time to time in connection with the transactions
          contemplated by the Tender Offer and the Nonwovens Acquisition (and
          the Administrative Agent and each Lender may conclusively rely on such
          certificate until it receives notice in writing from such Group
          Member).

               (d)  Officer's Certificate.  A certificate of a senior financial
                    ---------------------
          officer of PGI, dated the Term B Loan Closing Date, to the effect set
          forth in paragraphs (a) and (b) of the first sentence of Section 7.02
          hereof.

               (e)  Opinions of Counsel to the Group Members.  Opinions, dated
                    ----------------------------------------                  
          the Term B Loan Closing Date, of Kirkland & Ellis, special New York
          counsel to the Group Members, covering matters covered by the opinions
          of Kirkland & Ellis delivered in connection with the Credit Agreement
          (including, without limitation, with respect to the new Group
          Members), and in each case covering such other matters as the
          Administrative Agent or any Lender may reasonably request, including,
          without limitation, matters related to the Security Documents (and
          each Obligor hereby instructs such counsel to deliver each such
          opinion to the Lenders and to the Administrative Agent).

               (f)  Additional Security Documents.  The Administrative Agent
                    -----------------------------                           
          shall have received the following:

                         (i)    subject to the exclusions set forth in Section
               9.16 hereof, appropriate security agreements, pledge agreements,
               mortgages and other instruments duly executed and delivered by
               whichever of DomTex, the Resulting Nonwovens Entities or any of
               their Subsidiaries that is an Obligor hereunder, such that the
               Administrative Agent shall have a lien or mortgage on all of the
               Property of each such entity for the benefit of the Lenders
               hereunder as collateral security for the obligations of the
               Obligors hereunder, in each case covering such matters as shall
               be requested by the Administrative Agent and in each case in form
               and substance satisfactory to the Administrative Agent;

                         (ii)   all necessary modifications or confirmations to
               the Security Documents in effect on the Term B Loan Closing Date
               duly executed and delivered so as to ensure the continued
               effectiveness of the security interests created thereby and the
               spreading of the liens created thereby to cover the additional
               obligations to be incurred by the Obligors on the Term B Loan
               Closing Date, in each case covering such matters as shall be
               requested by the Administrative Agent and in each case in form
               and substance satisfactory to the Administrative Agent; and

                                Amendment No. 2
                                --------------- 
<PAGE>
 
                                      -19-

                         (iii)  evidence that such other action (including
               opinions of counsel and, in the case of real property, obtaining
               appropriate mortgagee title insurance policies) as shall be
               necessary to perfect or record the Liens contemplated by the
               foregoing clauses (i) and (ii) under applicable law shall have
               been taken.

          Without limiting the generality of the foregoing, the Resulting
          Nonwovens Entity that owns the DIFCO Business shall, on the Term B
          Loan Closing Date, execute and deliver to the Administrative Agent an
          intercompany note of the kind contemplated by Section 9.08(e) hereof
          in an amount and in form and substance satisfactory to the
          Administrative Agent and such Resulting Nonwovens Entity shall, within
          60 days following the Term B Loan Closing Date, grant to the
          Administrative Agent security in substantially all of its assets to
          secure such intercompany note and (within such 60 day period) execute
          and deliver to the Administrative Agent all security and other
          agreements and documents necessary to effect such grant.

               (g)  Notes.  The Facility A Revolving Credit Notes described in
                    -----                                                     
          clause (ii) of Section 2.08(a) hereof, the Facility B Revolving Credit
          Notes described in clause (ii) of Section 2.08(b) hereof and the Term
          B Loan Notes shall have been duly completed and executed.

               (h)  Nonwovens Acquisition.  The Nonwovens Acquisition shall be
                    ---------------------                                     
          consummated (concurrently with the borrowing to be made on the Term B
          Loan Closing Date) in a manner that is in form and substance
          satisfactory to the Majority Lenders and as contemplated by the Master
          Separation Agreement and any merger, asset purchase or other agreement
          to be executed in connection with the Nonwovens Acquisition shall be
          in form and substance satisfactory to the Majority Lenders.  The
          foregoing shall include, without limitation, the tender and retirement
          of all (other than up to U.S. $6,000,0000 thereof) of (i) the 9-1/4%
          Guaranteed Senior Notes due April 1, 2006 issued by Dominion Textile
          (USA) Inc. and (ii) the 8-7/8% Guaranteed Senior Notes due November 1,
          2003 issued by Dominion Textile (USA) Inc and the acquisition by BidCo
          of all equity interests of DomTex (including options and shares of
          preferred stock of any class) not acquired in the Tender Offer.

               (i)  Payment of Certain Fees and Expenses.  All amounts owing to
                    ------------------------------------                       
          Lenders under the Credit Agreement as in effect immediately prior to
          the Term B Loan Closing Date (including, without limitation, all
          amounts owing in respect of principal, accrued and unpaid interest and
          fees and amounts owing pursuant to 

                                Amendment No. 2
                                --------------- 
<PAGE>
 
                                      -20-

          Section 5.05 hereof) shall have been paid to such Lenders in full in
          the manner contemplated by Section 2.01(d) hereof.

               (j)  Schedule of Liabilities.  A schedule of  liabilities (as
                    -----------------------                                 
          contemplated by Section 8.12 hereof) being assumed by PGI or any of
          its Subsidiaries in connection with the Nonwovens Acquisition (or of
          liabilities that are on the books of any Subsidiaries being acquired
          by PGI or any of its Subsidiaries in such connection) shall have been
          attached hereto as Schedule XII and such Schedule XII shall be in form
          and substance satisfactory to the Administrative Agent.

               (k)  Other Documents.  Such other documents as the Administrative
                    ---------------                                             
          Agent, any Lender or special New York counsel to Chase may reasonably
          request."

          O.  Material Agreements and Liens.  Section 8.12 of the Credit
              -----------------------------                             
Agreement shall be deleted in its entirety and replaced with the following:

          "8.12  Material Agreements and Liens.

          (a)  (i) Part A of Schedule II hereto is a complete and correct list,
     as of the date of this Agreement (and after giving effect to the
     transactions contemplated to occur on the Effective Date) and (ii) Part A
     of Schedule XII hereto is a complete and correct list, as of the Term B
     Loan Closing Date (immediately after giving effect to the transactions
     contemplated to occur on the Term B Loan Closing Date), of each credit
     agreement, loan agreement, indenture, purchase agreement, lease, guarantee,
     letter of credit or other arrangement (excluding this Agreement) providing
     for or otherwise relating to any Indebtedness or any extension of credit
     (or commitment for any extension of credit) to, or guarantee by, any Group
     Member (or, in the case of clause (ii) above, any Resulting Nonwovens
     Entity), the aggregate principal or face amount of which equals or exceeds
     (or may equal or exceed) U.S. $100,000, and the aggregate principal or face
     amount outstanding or that may become outstanding under each such
     arrangement is correctly described in Part A of said Schedule II or
     Schedule XII (as applicable).

          (b)  (i) Part B of Schedule II hereto is a complete and correct list,
     as of the date of this Agreement (and after giving effect to the
     transactions contemplated to occur on the Effective Date) and (ii) Part B
     of Schedule XII hereto is a complete and correct list, as of the Term B
     Loan Closing Date (immediately after giving effect to the transactions
     contemplated to occur on the Term B Loan Closing Date), of each Lien
     securing Indebtedness of any Person (excluding the Security Documents) the
     aggregate principal or face amount of which equals or exceeds (or may equal
     or exceed) U.S. $100,000 and covering any Property of any Group Member (or,
     in the case of clause (ii) above, any 

                                Amendment No. 2
                                --------------- 
<PAGE>
 
                                      -21-

     Resulting Nonwovens Entity), and the aggregate Indebtedness secured (or
     which may be secured) by each such Lien and the Property covered by each
     such Lien is correctly described in Part B of said Schedule II or Schedule
     XII (as applicable)."

          P.  Prohibition of Fundamental Changes.  Section 9.05(d)(ii) of the
              ----------------------------------                             
Credit Agreement shall be deleted in its entirety and replaced with the
following:

               "(ii)  any of PGI's Restricted Subsidiaries may transfer any of
     its Property to any other Restricted Subsidiary of PGI, so long as any such
     transfer by a Wholly Owned Subsidiary of PGI shall be to a Wholly Owned
     Subsidiary of PGI; provided, however, that no transfer of shares of stock
                        --------                                              
     of any Resulting Nonwovens Entity that is not incorporated or otherwise
     formed under the laws of the United States of America or any of its states
     shall be permitted if any such transfer has the result that the shares of
     any such Resulting Nonwovens Entity can not be pledged to the
     Administrative Agent under the Security Documents and hereunder (by reason
     of the adverse tax consequences contemplated by Section 9.16(b) hereof);"

          Q.  Limitation on Liens.  Sections 9.06(a) and 9.06(b) of the Credit
              -------------------                                             
Agreement shall be deleted in their entireties and replaced with the following:

          "(a)  Liens created pursuant to the Security Documents and Liens
     contemplated by Section 9.08(e)(z) hereof;

          (b)  Liens in existence on the date hereof and listed in Part B of
     Schedule II hereto and Liens in existence on the Term B Loan Closing Date
     (immediately after giving effect to the transactions contemplated to occur
     on the Term B Loan Closing Date) and listed in Part B of Schedule XII
     hereto;"

          R.  Indebtedness.  Section 9.07(b) of the Credit Agreement shall be
              ------------                                                   
deleted in its entirety and replaced with the following:

          "(b)  Indebtedness outstanding on the date hereof and listed in Part A
     of Schedule II hereto, excluding, however, any Indebtedness in respect of
     the Intercompany Notes (which shall be governed by clause (d) below) and
     any Indebtedness in respect of the Existing Senior Notes (which shall be
     governed by clause (g) below) and Indebtedness in existence on the Term B
     Loan Closing Date (immediately after giving effect to the transactions
     contemplated to occur on the Term B Loan Closing Date) and listed in Part A
     of Schedule XII hereto;"

          S.  Investments.  Sections 9.08(d) and 9.08(e) of the Credit Agreement
              -----------                                                       
shall be deleted in their entireties and replaced with the following:

                                Amendment No. 2
                                --------------- 
<PAGE>
 
                                      -22-

          "(d)  Investments by any Group Member in any Wholly Owned Restricted
     Subsidiary (other than in Bonlam, Fabrene or their respective Subsidiaries
     and other than any Resulting Nonwovens Entity that is not incorporated or
     otherwise formed under the laws of the United States of America or any of
     its states, as to which clauses (e), (f), (g) and (h) below shall apply);

          (e)  Investments (x) in the case of Fabrene Holdings and PGI Polymer,
     evidenced by the Fabrene Intercompany Notes and constituting Indebtedness
     of Fabrene to Fabrene Holdings and PGI Polymer permitted under Section
     9.07(d) hereof, (y) in the case of PGI Polymer, evidenced by the Bonlam
     Intercompany Notes and constituting Indebtedness of Bonlam to PGI Polymer
     permitted under Section 9.07(d) hereof and (z) in the case of any Resulting
     Nonwovens Entity that is not incorporated or otherwise formed under the
     laws of the United States of America or any of its states, evidenced by an
     intercompany note (and secured by substantially all of the assets of such
     Resulting Nonwovens Entity) in form and substance satisfactory to the
     Administrative Agent and constituting Indebtedness of such Resulting
     Nonwovens Entity to PGI or one of its U.S. Restricted Subsidiaries, so long
     as in the case of all of the foregoing clauses (x), (y) and (z) such
     Intercompany Notes or notes shall have been delivered in pledge to the
     Administrative Agent pursuant to the Security Agreement on the Effective
     Date (or, in the case of any such Intercompany Notes or notes executed and
     delivered after the Effective Date, promptly following such execution and
     delivery);"

          T.  Restricted Payments.  Section 9.09 of the Credit Agreement shall
              -------------------                                             
be deleted in its entirety and replaced with the following:

          "9.09  Restricted Payments.  No Obligor will, nor will it permit any
                 -------------------                                          
     of its Restricted Subsidiaries to, make any Restricted Payments at any time
     during any fiscal year, provided that PGI may make Restricted Payments in
                             --------                                         
     cash so long as:

                 (i)    no Default shall have occurred and be continuing, and
          after giving effect to such Restricted Payment no Default shall have
          occurred and be continuing; and

                 (ii)   the aggregate amount of such Restricted Payments made
          by PGI during the period (the "Determination Period") from and
                                         --------------------           
          including December 28, 1996 to and including the date of such
          Restricted Payment shall not exceed an amount equal to the sum of (x)
          U.S. $25,000,000 plus 50% of Consolidated Net Income (to the extent
                           ----                                              
          positive) for each full fiscal year included in the Determination
          Period minus (y) 100% of Consolidated Net Income (to the extent
                 -----                                                   
          negative) for each full fiscal year included in the Determination
          Period plus (z) 
                 ----

                                Amendment No. 2
                                --------------- 
<PAGE>
 
                                      -23-

          the aggregate amount of dividends, distributions or other payments
          received by PGI or any of its Restricted Subsidiaries in cash in
          respect of any Investment constituting a Restricted Payment hereunder,
          and the aggregate amount received in cash in respect of the sale or
          other disposition or any Investments constituting a Restricted Payment
          hereunder (but shall not in any event be reduced by reason of any
          write-off of any such Investment).

     Notwithstanding the foregoing, (x) PGI may make cash payments to officers
     and employees in respect of shares of stock (or options therefor) granted
     to such officers and employees upon the termination of employment of such
     officer or employee (so long as the aggregate amount thereof paid in any
     single fiscal year shall not exceed U.S. $750,000) (and such cash payments
     shall not be included in determining the amount of Restricted Payments
     permitted above) and (y) so long as at the time thereof and after giving
     effect thereto no Event of Default shall have occurred or be continuing,
     Restricted Subsidiaries of the Obligors may make Dividend Payments in
     respect of their shares of stock to the Obligors and other Restricted
     Subsidiaries of the Obligors (and such payments shall not be included in
     determining the amount of Restricted Payments permitted above)."

          U.  Leverage Ratio.  Section 9.10 of the Credit Agreement shall be
              --------------                                                
deleted in its entirety and replaced with the following:

          "(a)  Leverage Ratio.  PGI will not permit the Leverage Ratio to
                --------------                                            
     exceed the following respective ratios at any time during the following
     respective periods:

<TABLE>
<CAPTION>
          Period                                                    Ratio      
          ------                                                    -----     
          <S>                                                       <C>       
                                                                              
     From the Effective Date through                                     
     but excluding the last day                                         
     of the first fiscal quarter in 1999                          5.85 to 1 
                                                                        
     From the last day of the first fiscal                               
     quarter in 1999 through but excluding the                          
     last day of the first fiscal quarter in 2000                 5.45 to 1  
</TABLE> 

                                Amendment No. 2
                                ---------------
<PAGE>
 
                                      -24-


From the last day of the first fiscal
 quarter in 2000 through but excluding the
 last day of the first fiscal quarter in 2001             5.00 to 1
 
From the last day of the first fiscal
 quarter in 2001 through but excluding the
 last day of the first fiscal quarter in 2002             4.75 to 1
 
From the last day of the first fiscal
 quarter in 2002 through but excluding the
 last day of the first fiscal quarter in 2003             4.50 to 1
 
From the last day of the first fiscal
 quarter in 2003 and at all times thereafter              4.25 to 1

     (b)  Senior Leverage Ratio. PGI will not, immediately after giving
          ---------------------
effect to any Acquisition permitted under Section 9.05(d)(iv) hereof, permit the
Senior Leverage Ratio to exceed the respective ratio set forth below opposite
the period in which such Acquisition shall occur:

     Period                                                 Ratio
     ------                                                 -----

From the Effective Date through
 but excluding the last day
 of the first fiscal quarter in 1999                      3.50 to 1
 
From the last day of the first fiscal
 quarter in 1999 through but excluding the
 last day of the first fiscal quarter in 2001             3.25 to 1
 
From the last day of the first fiscal
 quarter in 2001 and at all times thereafter              3.00 to 1

     (c)  Fixed Charges Ratio. PGI will not permit the Fixed Charges Ratio to be
          -------------------
less than the following respective ratios at the end of any fiscal quarter which
falls within the following respective periods:


                                Amendment No. 2
                                ---------------
<PAGE>
 
                                      -25-

     Period                                                        Ratio
     ------                                                        -----

From the Effective Date through
 but excluding the last day
 of the first fiscal quarter in 1999                              1.15 to 1
 
From the last day of the first fiscal
 quarter in 1999 through but excluding the
 last day of the first fiscal quarter in 2000                     1.30 to 1
 
From the last day of the first fiscal
 quarter in 2000 and at all times thereafter                      1.40 to 1

     (d)  Net Worth. PGI will not permit Net Worth to be less than the following
          ---------
respective amounts at any time during the following respective periods:

     Period                                                           Amount
     ------                                                           -------
 
From the Effective Date through
 but excluding the last day
 of the first fiscal quarter in 1998                         U.S. $156,000,000

From the last day of the first fiscal
 quarter in 1998 through but excluding the
 last day of the first fiscal quarter in 1999                U.S. $170,500,000
 
From the last day of the first fiscal
 quarter in 1999 through but excluding the
 last day of the first fiscal quarter in 2000                U.S. $186,500,000
 
From the last day of the first fiscal
 quarter in 2000 through but excluding the
 last day of the first fiscal quarter in 2001                U.S. $203,500,000
 
From the last day of the first fiscal
 quarter in 2001 through but excluding the
 last day of the first fiscal quarter in 2002                U.S. $222,500,000
 

                                Amendment No. 2
                                ---------------
<PAGE>
 
                                      -26-


     From the last day of the first fiscal                   
      quarter in 2002 through but excluding the 
      last day of the first fiscal              
      quarter in 2003                                        U.S. $243,000,000
                                                
     From the last day of the first fiscal      
      quarter in 2003 and at all                
      times thereafter                                       U.S. $251,000,000

Notwithstanding the foregoing, in the event that PGI shall take any write-off in
connection with any one or more Acquisitions, the amounts set forth above shall
be adjusted downward by the cumulative amount of such charge-offs, provided,
                                                                   -------- 
that in no event shall the aggregate amount of such downward adjustments after
the Effective Date exceed U.S. $50,000,000."

          V.   Modification of Certain Documents.  (i)  Section 9.14 of the
               ---------------------------------                           
Credit Agreement shall be amended by inserting the following after the words
"Subordinated Acquisition Debt Documents":  "or the Master Separation
Agreement".

          (ii) Section 9.14 of the Credit Agreement shall be further amended by
adding the following sentence at the end thereof:  "Additionally, the Obligors
will not, and will not permit their Subsidiaries to, execute and deliver any of
the 'Ancillary Separation Agreements' under and as defined in the Master
Separation Agreement, unless and until the Administrative Agent shall first have
reviewed the form thereof and consented thereto."

          W.   Certain Agency Provisions. Sections 11.02 and 11.03 of the Credit
               -------------------------     
Agreement shall be amended by adding after the words "the Majority Facility B
Revolving Credit Lenders" the following wherever such words appear: "or the
Majority Term B Loan Lenders".

          X.   Amendments.  Section 12.04 of the Credit Agreement shall be
               ----------                                                 
amended as follows:

          (i)  The first paragraph of Section 12.04 of the Credit Agreement
     shall be amended by adding after the words "the Majority Facility B
     Revolving Credit Lenders" the following: "or the Majority Term B Loan
     Lenders".

          (ii) The second paragraph of Section 12.04 of the Credit Agreement
     shall be amended by deleting the "and" following clause (A) therein and
     substituting a comma in lieu thereof, and then by adding the following
     after clause (B):


                                Amendment No. 2
                                ---------------
<PAGE>
 
                                      -27-

          "and (C) no waiver or modification of any provision of this Agreement
          that has the effect (either immediately or at some later time) of
          enabling PGI to satisfy a condition precedent to the making of a Term
          B Loan shall be effective against the Term B Loan Lenders for the
          purposes of the Term B Loan Commitments unless the Majority Term B
          Loan Lenders shall have concurred with such waiver or modification".

          Y.   Treatment of Confidential Information.  Section 12.16(b) of the
               -------------------------------------                          
Credit Agreement shall be deleted in its entirety and replaced with the
following:

          "(b) Each Lender and the Administrative Agent agrees (on behalf of
     itself and each of its affiliates, directors, officers, employees and
     representatives) to use reasonable precautions to keep confidential, in
     accordance with their customary procedures for handling confidential
     information of this nature and (with respect to those Lenders which are
     banks) in accordance with safe and sound banking practices, any non-public
     information supplied to it by the Obligors pursuant to this Agreement which
     is identified by such Person as being confidential at the time the same is
     delivered to the Lenders or the Administrative Agent, provided that nothing
                                                           --------             
     herein shall limit the disclosure of any such information (i) to the extent
     required by statute, rule, regulation or judicial process, (ii) to counsel
     for any of the Lenders or the Administrative Agent, (iii) to bank
     examiners, auditors, accountants, the National Association of Insurance
     Commissioners or any regulatory authority, (iv) to the Administrative Agent
     or any other Lender, (v) in connection with any litigation to which any one
     or more of the Lenders or the Administrative Agent is a party, (vi) to a
     subsidiary or affiliate of such Lender as provided in paragraph (a) above
     or (vii) to any Lender, assignee or participant (or prospective assignee or
     participant) or to direct or indirect contractual counterparties to swap
     agreements or such contractual counterparties' professional advisers so
     long as such assignee or participant (or prospective assignee or
     participant) or contractual counterparty or professional adviser to such
     contractual counterparty first executes and delivers to the respective
     Lender a Confidentiality Agreement substantially in the form of Exhibit K
     hereto provided, further, that in no event shall any Lender or the
            --------  -------                                          
     Administrative Agent be obligated or required to return any materials
     furnished by the Obligors.  The obligations of each Lender under this
     Section 12.16 shall supersede and replace the obligations of such Lender
     under any confidentiality letter in respect of this financing signed and
     delivered by such Lender to any Group Member."

          Z.   Certain Tax Considerations.   The following new Section 12.19
               --------------------------                                   
shall be added to the Credit Agreement:

          "(a) Any Term B Loan Lender (i) that is not a citizen or resident of
     the United States of America, a corporation, partnership or other entity
     created or organized in or 


                                Amendment No. 2
                                ---------------
<PAGE>
 
                                      -28-


     under any laws of the United States of America, a trust subject to the
     control of a U.S. person and the primary supervision of a U.S. court, or
     any estate that is subject to Federal income taxation regardless of the
     source of its income and (ii) that is not a "bank" within the meaning of
     section 881 (c)(3)(A) of the U.S. Internal Revenue Code and (iii) that
     could become completely exempt from withholding of any tax, assessment or
     other charge or levy imposed by or on behalf of the United States of
     America or any taxing authority thereof ("U.S. Taxes") in respect of
                                               ----------
     payment of any obligations due to such Lender under this Agreement
     ("Obligations") if the Obligations were in registered form for U.S. Federal
       -----------
     income tax purposes (a "Non-U.S. Lender") may request PGI (through the
                             ---------------
     Administrative Agent), and PGI agrees thereupon, to record on the Register
     to which paragraph (d) below refers any Obligations held by such Non-U.S.
     Lender.

          (b)  Obligations recorded on the Register ("Registered Obligations")
                                                      ----------------------  
     may not be evidenced by promissory notes other than Registered Notes as
     defined below and, upon the registration of any Obligation, any promissory
     note (other than a Registered Note) evidencing the same shall be null and
     void and shall be returned to PGI.  PGI agrees, at the request of any Non-
     U.S. Lender holding any Registered Obligation(s), to issue promissory
     note(s) registered as provided in paragraph (d) below (each, a "Registered
                                                                     ----------
     Note") to evidence such Registered Obligation(s).  An Obligation once
     ----                                                                 
     recorded on the Register may not be removed from the Register as long as it
     remains outstanding and a Registered Note may not be exchanged for a
     promissory note that is not a Registered Note.  Registered Notes may be
     surrendered to PGI for cancellation so that the Registered Obligations that
     were evidenced thereby are no longer evidenced by any promissory notes.

          (c)  Each Non-U.S. Lender holding Registered Obligations (a
     "Registered Holder") (or, if such Registered Holder is not the beneficial
      -----------------
     owner thereof, such beneficial owner) (i) shall, if legally entitled to do
     so, deliver to PGI prior to or at the time such Non-U.S. Lender becomes a
     Registered Holder a Form W-8 (Certificate of Foreign Status of the U.S.
     Department of Treasury) (or any successor or related form adopted by the
     U.S. taxing authorities), together with an annual certificate stating that
     such Registered Holder (or beneficial owner, as the case may be) is not a
     "bank" within the meaning of section 881 (c)(3)(A) of the U.S. Internal
     Revenue Code and (ii) shall promptly notify PGI if at any time such
     Registered Holder (or beneficial owner, as the case may be) determines that
     it is no longer in a position to provide such certification to PGI (or any
     other form of certification adopted by the U.S. taxing authorities for such
     purposes). Any Registered Holder that fails to deliver Form W-8 and such
     certificate when it is entitled to do so shall not be entitled to the
     additional amounts or the indemnity (if any) provided in this Agreement for
     or in respect of the withholding of U.S. Taxes.


                                Amendment No. 2
                                ---------------
<PAGE>
 
                                      -29-


          (d)  At the request of any Non-U.S. Lender PGI shall maintain, or
     cause to be maintained, a register (the "Register") (which, at the request
                                              -------- 
     of PGI, shall be kept by the Administrative Agent on behalf of PGI at no
     extra charge to PGI at the address to which notices to the Administrative
     Agent are to be sent under this Agreement) on which it enters the name of
     the Registered Holder of Registered Obligation(s) (and any Registered Note
     evidencing the same). A Registered Obligation (and any Registered Note
     evidencing the same) may be assigned or otherwise transferred in whole or
     in part only by registration of the assignment or transfer of such
     Registered Obligation (and any Registered Note evidencing the same) on the
     Register (and each Registered Note shall expressly so provide). Any
     assignment or transfer of all or part of such Registered Obligation (and
     any Registered Note evidencing the same) shall be registered on the
     Register only upon presentment for registration of a written instrument of
     assignment or transfer of such Registered Obligation duly executed by the
     Registered Holder (together with surrender of any Registered Note
     evidencing such Registered Obligation, duly endorsed by (or accompanied by
     a written instrument of assignment or transfer duly executed by) the
     Registered Holder thereof, and thereupon, at the request of the designated
     assignee(s) or transferee(s), one or more new Registered Note(s) in the
     same aggregate principal amount shall be issued to the designated
     assignee(s) or transferee(s). Prior to such due presentment for
     registration of assignment or transfer, PGI and the Administrative Agent
     shall treat the Person in whose name such Registered Obligation (and any
     Registered Note evidencing the same) is registered as the owner thereof for
     the purpose of receiving all payment thereon and for all other purposes,
     notwithstanding any notice to the contrary.

          (e)  The Register shall be available for inspection by PGI and any
     Lender at any reasonable time upon reasonable prior notice."

          AA.  Additional Schedules; Additional Exhibit.  The Credit Agreement
               ----------------------------------------                       
shall be amended by attaching thereto and making a part thereof Schedules IX, X,
XI and XII attached hereto and Exhibit A-3 attached hereto.

          Section 3.  Security Agreement.  Effective as of the Term B Loan
                      ------------------                                  
Closing Date, PGI, the Domestic Non-Borrower Guarantors and the Administrative
Agent agree that the Security Agreement shall be amended by replacing the amount
"U.S. $325,000,000" in the third paragraph thereof with the amount "U.S.
$450,000,000" and, for avoidance of doubt, that the "Credit Agreement" referred
to in the Security Agreement shall mean the Credit Agreement as amended hereby.

          Section 4.  Representations and Warranties.  Each Obligor represents
                      ------------------------------                          
and warrants to the Lenders and the Administrative Agent that the
representations and warranties set forth in Section 8 of the Credit Agreement as
amended hereby are true and complete on the date 


                                Amendment No. 2
                                ---------------
<PAGE>
 
                                      -30-


hereof as if made on and as of the date hereof and as if each reference in said
Section 8 to "this Agreement" include reference to this Amendment No. 2.

          Section 5.  Conditions Precedent.  As provided in Section 2 above, the
                      --------------------                                      
amendments to the Credit Agreement set forth in said Section 2 shall become
effective, as of the date hereof, when each Obligor, each Lender and the
Administrative Agent shall have executed and delivered a counterpart of this
Amendment No. 2 to the Administrative Agent.

          Section 6.  Miscellaneous.  Except as herein provided, the Credit
                      -------------                                        
Agreement shall remain unchanged and in full force and effect.  This Amendment
No. 2 may be executed in any number of counterparts, all of which taken together
shall constitute one and the same amendatory instrument and any of the parties
hereto may execute this Amendment No. 2 by signing any such counterpart.  This
Amendment No. 2 shall be governed by, and construed in accordance with, the law
of the State of New York.


                                Amendment No. 2
                                ---------------
<PAGE>
 
                                      -31-


          IN WITNESS WHEREOF, the parties hereto have caused this Amendment No.
2 to be duly executed and delivered as of the day and year first above written.

                                 THE BORROWERS
                                 -------------

POLYMER GROUP, INC.                 PGI NONWOVENS B.V.


By:_____________________            By:_____________________
 Name:                                  Name:
 Title:                                 Title:


CHICOPEE HOLDINGS B.V.              FABRENE INC.
(incorporated in the State
of Delaware under the name
Chicopee Holdings (Netherlands)
B.V. Corporation)

By:_____________________            By:_____________________
 Name:                              Name:
 Title:                             Title:


                                Amendment No. 2
                                ---------------
<PAGE>
 
                                      -32-


                       DOMESTIC NON-BORROWER GUARANTORS
                       --------------------------------


FIBERTECH GROUP, INC.                   CHICOPEE, INC.


By___________________                   By_____________________
 Name:                                   Name:
 Title:                                  Title:


PGI POLYMER, INC.                       CHICOPEE HOLDINGS, INC.


By___________________                   By_____________________
 Name:                                   Name:
 Title:                                  Title:

TECHNETICS GROUP, INC.                  FABRENE GROUP, L.L.C.


By___________________                   By_____________________
 Name:                                   Name:
 Title:                                  Title:


FABRENE CORP.                           FIBERGOL CORPORATION


By___________________                   By_____________________
 Name:                                   Name:
 Title:                                  Title:


                                Amendment No. 2
                                ---------------
<PAGE>
 
                                      -33-


FABRENE GROUP, INC.                     PNA CORP.



By___________________                   By_____________________
 Name:                                   Name:
 Title:                                  Title:


FNA POLYMER CORP.


By___________________
 Name:
 Title:

                                Amendment No. 2
                                ---------------
<PAGE>
 
                                      -34-

                                    LENDERS
                                    -------

THE CHASE MANHATTAN BANK                 THE CHASE MANHATTAN
                                          BANK OF CANADA

By___________________                    By_____________________
 Name:                                    Name:
 Title:                                   Title:


THE BANK OF NOVA SCOTIA                  THE BANK OF NOVA SCOTIA,
                                          as Canadian Dollar Lender


By___________________                    By_____________________
 Name:                                    Name:
 Title:                                   Title:


BHF-BANK AKTIENGESELLSCHAFT              CORESTATES BANK, N.A.


By___________________                    By_____________________
 Name:                                    Name:
 Title:                                   Title:

By___________________
 Name:
 Title:


CIBC INC.


By___________________
 Name:
 Title:


                                Amendment No. 2
                                ---------------
<PAGE>
 
                                      -35-

CANADIAN IMPERIAL BANK                   COMPAGNIE FINANCIERE DE
 OF COMMERCE                                CIC ET DE L'UNION
                                          EUROPEENNE


By___________________                    By_____________________
 Name:                                    Name:
 Title:                                   Title:

                                         By_____________________
                                          Name:
                                          Title:


CREDIT LYONNAIS ATLANTA                  CREDIT LYONNAIS CANADA
 AGENCY

By___________________                    By_____________________
 Name:                                    Name:
 Title:                                   Title:

                                         By_____________________
                                          Name:
                                          Title:

 
COOPERATIEVE CENTRALE                    THE ROYAL BANK OF
 RAIFFEISEN-BOERENLEENBANK                  SCOTLAND PLC
 B.A., "RABOBANK NEDERLAND",
 NEW YORK BRANCH

By___________________                    By_____________________
 Name:                                    Name:
 Title:                                   Title:

By___________________
 Name:
 Title:

                                Amendment No. 2
                                ---------------
<PAGE>
 
                                      -36-


WACHOVIA BANK, N.A.                     BANK OF SCOTLAND


By___________________                   By_____________________
 Name:                                   Name:
 Title:                                  Title:


CREDITANSTALT AG                         DG BANK, NEW YORK
                                          BRANCH


By___________________                    By_____________________
 Name:                                    Name:
 Title:                                   Title:

By___________________
 Name:
 Title:


MERITA BANK LTD,                         NATIONAL CITY BANK
 NEW YORK BRANCH


By___________________                    By_____________________
 Name:                                    Name:
 Title:                                   Title:


                                Amendment No. 2
                                ---------------
<PAGE>
 
                                      -37-

ERSTE BANK                               THE DAI-ICHI KANGYO
                                          BANK, LIMITED,
                                          ATLANTA AGENCY

By___________________                    By_____________________
 Name:                                    Name:
 Title:                                   Title:


THE FIRST NATIONAL                       ROYAL BANK OF CANADA
 BANK OF CHICAGO


By___________________                    By_____________________
 Name:                                    Name:
 Title:                                   Title:


ING HIGH INCOME PRINCIPAL                ROYAL BANK OF CANADA,
 PRESERVATION FUND HOLDINGS, LDC          as Canadian Dollar Lender
ING Capital Advisors Inc., as
Investment Advisors

By___________________                    By_____________________
 Name:                                    Name:
 Title:                                   Title:


OAK HILL SECURITIES FUND, L.P.,

 By:  Oak Hill Securities GenPar, L.P.,
       its General Partner
 By:  Oak Hill Securities MPG, Inc.,
       its General Partner


By___________________
 Name:
 Title:


                                Amendment No. 2
                                ---------------
<PAGE>
 
                                      -38-



KZH-CRESCENT CORPORATION                  KZH-CRESCENT-2
                                          CORPORATION


By___________________                     By_____________________
 Name:                                     Name:
 Title:                                    Title:


PRIME INCOME TRUST                        DEEPROCK & COMPANY,
                                          By:  Eaton Vance Management,
                                          as Investment Adviser

By___________________                     By_____________________
 Name:                                     Name:
 Title:                                    Title:

 
PILGRIM AMERICA PRIME RATE TRUST



By___________________
 Name:
 Title:


KZH-ING-2 CORPORATION                    KZH HOLDING
                                          CORPORATION III


By___________________                    By_____________________
 Name:                                    Name:
 Title:                                   Title:


                                Amendment No. 2
                                ---------------
<PAGE>
 
                                      -39-

CYPRESS TREE INVESTMENT MANAGEMENT
 COMPANY, INC.,

 As Attorney-in-Fact and on behalf of
 First Allamerica Financial Life Insurance Company,

 As Portfolio Manager


By____________________
 Name:
 Title:


THE CHASE MANHATTAN BANK,
 as Administrative Agent

By___________________
 Name:
 Title:


                                Amendment No. 2
                                ---------------
<PAGE>
 
                                                                     SCHEDULE IX

                    FACILITY A REVOLVING CREDIT COMMITMENTS
                    ---------------------------------------

<TABLE>
<CAPTION>
Lender                                            Facility A Revolving Credit Commitment
------                                            --------------------------------------                
<S>                                               <C>
BHF-Bank Aktiengesellschaft                                   U.S. $ 20,750,000
 
Corestates Bank, N.A.                                         U.S. $ 20,750,000 
 
Compagnie Financiere de CIC
  et de l'union Europeenne                                    U.S. $ 18,750,000
                                                              
Cooperatieve Centrale Raiffeisen-                             
  Boerenleenbank B.A., "Rabobank                              
  Nederland", New York Branch                                 U.S. $ 18,750,000
                                                              
The Royal Bank of Scotland PLC                                U.S. $ 18,750,000
                                                              
Wachovia Bank, N.A.                                           U.S. $ 18,750,000
                                                              
ING High Income Principal Preservation                        
  Fund Holdings, LDC                                          U.S. $ 14,750,000
                                                              
The First National Bank of                                    
  Chicago                                                     U.S. $ 14,750,000
                                                              
CIBC Inc.                                                     U.S. $ 13,750,000
                                                              
Credit Lyonnais Atlanta Agency                                U.S. $ 13,750,000
                                                              
Creditanstalt AG                                              U.S. $ 13,750,000
                                                              
DG Bank, New York Branch                                      U.S. $ 13,750,000
                                                              
Merita Bank Ltd, New York                                     
   Branch                                                     U.S. $ 13,750,000
                                                              
National City Bank                                            U.S. $ 13,750,000
                                                              
The Chase Manhattan Bank                                      U.S. $ 13,500,000
                                                              
The Bank of Nova Scotia                                       U.S. $ 13,250,000
                                                              
Bank of Scotland                                              U.S. $ 10,000,000
</TABLE> 
                                                              

                                Amendment No. 2
                                ---------------
<PAGE>
 
                                      -2-

<TABLE> 
<S>                                                           <C>  
The Dai-Ichi Kangyo Bank, Limited                             
  Atlanta Agency                                              U.S. $ 10,000,000
                                                              
Erste Bank                                                    U.S. $ 10,000,000
                                                              
Royal Bank of Canada                                          U.S. $  9,750,000
                                                              _________________
 
                                                              U.S. $295,000,000
</TABLE>


                                Amendment No. 2
                                ---------------
<PAGE>
 
                                                                      SCHEDULE X
            
                    FACILITY B REVOLVING CREDIT COMMITMENTS
                    ---------------------------------------
           
<TABLE>
<CAPTION>
Lender                                            Facility A Revolving Credit Commitment
------                                            --------------------------------------   
<S>                                              <C>
The Chase Manhattan Bank of Canada                             U.S. $ 7,500,000
            
The Bank of Nova Scotia,
 as Canadian Dollar Lender                                     U.S. $ 7,500,000
             
Canadian Imperial Bank of Commerce                             U.S. $ 5,000,000
             
Credit Lyonnais Canada                                         U.S. $ 5,000,000
             
Royal Bank of Canada,
 as Canadian Dollar Lender                                     U.S. $ 5,000,000
                                                               ________________
            
                                                               U.S. $30,000,000
</TABLE>
            

                                Amendment No. 2
                                ---------------
<PAGE>
 
                                                                     SCHEDULE XI
            
                            TERM B LOAN COMMITMENTS
                            -----------------------
            
<TABLE>
<CAPTION>
Lender                                                     Term B Loan Commitment
------                                                     ----------------------
<S>                                                        <C>
The Chase Manhattan Bank                                      U.S. $ 41,000,000
 
KZH Holding Corporation III                                   U.S. $ 28,000,000
 
Oak Hill Securities Fund, L.P.                                U.S. $ 11,000,000
 
Pilgrim America Prime Rate Trust                              U.S. $ 10,000,000
 
Prime Income Trust                                            U.S. $  7,000,000
 
Cypress Tree Investment
  Management Company, Inc.                                    U.S. $  7,000,000
 
KZH-Crescent-2 Corporation                                    U.S. $  6,000,000
 
ING High Income Principal
  Preservation Fund Holdings, LDC                             U.S. $  5,000,000
 
KZH-ING-2 Corporation                                         U.S. $  5,000,000
 
KZH-Crescent Corporation                                      U.S. $  4,000,000
 
Deeprock & Company                                            U.S. $  1,000,000
                                                              _________________
 
                                                              U.S. $125,000,000
</TABLE>


                                Amendment No. 2
                                ---------------
<PAGE>
 
                                                                    SCHEDULE XII

                         MATERIAL AGREEMENTS AND LIENS
                         -----------------------------

                               [See Section 8.12]


                                Amendment No. 2
                                ---------------
<PAGE>
 
                                                                     EXHIBIT A-3

                          [Form of Term B Loan Note]

                                PROMISSORY NOTE
                                (Term B Loans)


U.S. $___________                                                  _______, 1998
                                                              New York, New York

          FOR VALUE RECEIVED, POLYMER GROUP, INC., a corporation duly organized
and validly existing under the laws of the State of Delaware (the "Maker"),
                                                                   -----   
hereby promises to pay to __________________ (the "Lender") [or registered
                                                   ------                 
assigns]/1/, for account of its respective Applicable Lending Offices provided
for by the Credit Agreement referred to below, at the principal office of The
Chase Manhattan Bank at 270 Park Avenue, New York, New York 10017, the principal
sum of _______________ U.S. Dollars (or such lesser amount as shall equal the
aggregate unpaid principal amount of the Term B Loans made by the Lender to the
Maker under the Credit Agreement), in lawful money of the United States of
America and in immediately available funds, on the dates and in the principal
amounts provided in the Credit Agreement, and to pay interest on the unpaid
principal amount of each such Term B Loan, at such office, in like money and
funds, for the period commencing on the date of such Term B Loan until such Term
B Loan shall be paid in full, at the rates per annum and on the dates provided
in the Credit Agreement.

          [This Note and the Loans evidenced hereby may be transferred in whole
or in part only by registration of such transfer on the register maintained for
such purpose by or on behalf of PGI as provided by the Credit Agreement.]

          The date, amount, Type, interest rate and duration of Interest Period
(if applicable) of each Term B Loan made by the Lender to the Maker, and each
payment made on account of the principal thereof, shall be recorded by the
Lender on its books and, prior to any transfer of this Note, endorsed by the
Lender on the schedule attached hereto or any continuation thereof (and the
Maker hereby authorizes the Lender to endorse such recording on the schedule
attached hereto), provided that the failure of the Lender to make any such
                  --------                                                
recordation or endorsement shall not affect the obligations of the Maker to make
a payment when due of any amount owing under the Credit Agreement or hereunder
in respect of the Term B Loans made by the Lender.

          This Note is one of the Term B Loan Notes [(constituting a Registered
Note)] referred to in the Second Amended, Restated and Consolidated Credit
Agreement dated as of July 3, 1996 (as modified and supplemented and in effect
from time to time, the "Credit Agreement") between the Maker, the other
                        ----------------                               
"Borrowers" named therein, the Domestic Non-

__________________
/1/  Bracketed language to be inserted into Registered Notes



                                Amendment No. 2
                                ---------------
<PAGE>
 
                                      -7-

Borrower Guarantors named therein, the lenders named therein (including the
Lender), and The Chase Manhattan Bank, as Administrative Agent, and evidences
Term B Loans made by the Lender to the Maker thereunder. Terms used but not
defined in this Note have the respective meanings assigned to them in the Credit
Agreement.

          The Credit Agreement provides for the acceleration of the maturity of
this Note upon the occurrence of certain events and for prepayments of Loans
upon the terms and conditions specified therein.

          Except as permitted by Section 12.06(b) of the Credit Agreement, this
Note may not be assigned by the Lender to any other Person.

          This Note shall be governed by, and construed in accordance with, the
law of the State of New York.

          The Maker hereby waives presentment, demand, notice of protest or
notice of any other kind with respect to this Note.

                              POLYMER GROUP, INC.


                              By_________________________
                                Title:



                                Amendment No. 2
                                ---------------
<PAGE>
 
                            SCHEDULE OF TERM B LOANS

          This Note evidences Term B Loans made to the Maker, or Continued or
Converted, under the within-described Credit Agreement, on the dates, in the
principal amounts, of the Types, bearing interest at the rates and having
Interest Periods (if applicable) of the durations set forth below, subject to
the payments, Continuations, Conversions and prepayments of principal set forth
below:



<TABLE>
<CAPTION>
                                                             Amount
Date           Prin-                                          Paid,
Made,          cipal                            Duration     Prepaid,     Unpaid
Continued      Amount      Type                    of       Continued      Prin- 
  or             of         of      Interest    Interest       or          cipal      Notation
Converted       Loan       Loan       Rate       Period     Converted     Amount       Made by
------------  ---------  --------  ---------  -----------  ------------  -----------  ---------
<S>           <C>        <C>       <C>        <C>          <C>           <C>          <C>          
</TABLE>

    
                              Amendment No. 2    
                              ---------------