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Filing for bankruptcy will give American Apparel bosses some breathing space

American Apparel, which has been crippled by a fall in sales and a drawn-out legal battle with founder Dov Charney, has filed for chapter 11 bankruptcy protection.
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The filing followed a deal with 95 per cent of its lenders to reduce its debts through a debt-for-equity conversion. This will enable the company to keep its manufacturing operations in Los Angeles, as well as 130 stores in the US.

It is said that the bankruptcy would wipe out American Apparel’s current shareholders – including Charney – and put the company’s creditors in full control instead. 

This comes after American Apparel’s losses over the last five years topped $340m, with another $45m lost in 2015. And the New York Stock Exchange warned that American Apparel was at risk of being delisted as it was questionable whether the retailer could stay in business.  

The financing will reduce American Apparel’s debt to $120m from $311m, and its annual interest expenses would fall by $24m, the company said.

The retailer had been in the middle of a turnaround plan that included freshening up its product lineup, overhauling its supply chain and reining in American Apparel’s advertising.

Paula Schneider, who was brought in January to salvage American Apparel’s operations, is expected to stay on as CEO through the bankruptcy proceedings.

“Our debt load simply wasn’t sustainable. You can’t do a turnaround plan without cash,” Schneider said. “Every day, we would make choices on what we were going to buy, even though we needed more for everyone. Every day, I have to pick between what I’m buying for retail or wholesale, or giving ecommerce enough money to develop a mobile app.

“And it was all to get to the point where we could make these massive interest payments, and nothing that was really moving the company forward,” she said. 

Schneider also claimed that the bankruptcy proceedings would delay numerous lawsuits against the company, giving its management some breathing room.

“Not having the nuisance lawsuits, not having this massive debt, these are all extremely important things for the company to thrive,” she said.

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Shané Schutte

Shané Schutte is a senior reporter at Real Business, with a particular specialism in employment and business law, human resources, information technology and sales/marketing.

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