Note: this part of the tutorial is written for GIMP 2.6. If you have Photoshop or another similar program and are familiar with it, you should be able to work out how to achieve the same result by following these instructions, but I can only offer support for GIMP. You also need to make sure your software supports layer masks.
First of all, we need to launch GIMP, and create a new image. One important thing to keep in mind is that your image's dimensions must be powers of 2. It should also be wider than higher, if it isn't square. In my case, I want the text to be fairly high resolution, so I'll go for 1024X512.
So this is what the GIMP window should look like:
Next step is to choose the text's colour. We can also give it a fancy gradient or texture, but I'll simply go for a solid cyan with the bucket fill tool.
Now for the text itself. To do that, we'll need a layer mask, so go ahead and right click the "background" layer in the layers window, and choose "Add Layer Mask...".
We'll make it a full black layer mask with the appropriate radio button, and click "Add".
Our image should now be fully transparent, and show the grey checkered background. We'll now need to show the layer mask so we can edit it, so go ahead and right click the layer again, this time choosing "Show Layer Mask" (you should also make sure "Disable Layer Mask" isn't checked while you're at it). The image should now turn fully black.
Now's time for the actual text. Using the text tool, we'll write our line of text in white (the white colour is important). The thing to keep in mind here is to take up most of the image with text so that it's as high resolution as possible, but by still keeping a bit of blank on both sides. This'll make it easier to set the text's length in SFM. Something like this will do the job quite well:
So now the layers window should look like this, with the text in its own layer above the actual image layer:
We'll need to paste this text into the layer mask. To do so, select the text layer, then select the whole image (Ctrl+A), copy it (Ctrl+C), select the background layer's mask (the black rectangle/square), paste (Ctrl+V), click outside of the image's boundaries with the select tool to apply the floating layer. You can then delete the text layer. You should now have something like this:
We can now right click the layer and uncheck "Show Layer Mask", to preview what the text will actually look like in SFM.
If you're happy with the result, next step is to rotate the image 90°. This is important, because rope particle systems in SFM read textures from top to bottom. To do that, Just go into "Image", then "Transform", then "Rotate 90° counter-clockwise" (clockwise also works though, it just means you'll have to move a different joint on the particle system in SFM. More on this in part 3).
And that's it, the texture's done! Now we need to save it into a .tga image. First thing is to make sure the actual image is seleted in the layers window, not the layer mask. If the mask is selected it won't save correctly (you'll get a warning if you attempt to save the layer mask instead). Then go into "File", "Save as..." (I hear it's "Export" in GIMP 2.8, thanks to Pte Jack for pointing that out). Give it an eloquent name and save it somewhere you'll remember. For now I'll save it on the desktop, and call it "hello.tga".
You'll have to "export" the .tga, not just save it. The menus differ depending on the version of GIMP you have, but the bottom line is to do what GIMP tells you will allow you to retain the layer mask data.
Now that we have a texture file saved as a .tga, we need to make it into a .vtf (Valve Texture File). Thankfully, with VTFEdit, this is a piece of cake. So let's Launch VTFEdit, and import our .tga file. The import dialog appears:
Uncheck "Generate Mipmaps", if it isn't already. Mipmaps will only make the texture look bad in the case of a rope particle system. Click "OK". This is what the imported image looks like:
It might seem like the layer mask is gone, but it's simply not visible by default in VTFEdit. You can preview it by clicking "View", then "Mask".
All you really have to do now is click "Save", and save the .vtf file.