FILED FOR BANKRUPTCY

American Apparel’s Chapter 11 petition, which was approved by its board, was filed in federal bankruptcy court in Delaware early on Monday, October 5. The filing followed a deal struck with most of the company’s secured lenders to reduce its debt through a debt-for-equity conversion. The deal also includes extra financing from participating bondholders that will enable American Apparel to keep its manufacturing operations in Los Angeles running and its 130 stores in the US open. The bankruptcy will wipe out American Apparel’s current shareholders, including founder and former CEO, Dov Charney, whose stake in the company was worth was about $8.2 million as of Friday, October 2. The deal will put the company’s creditors in full control. There are also numerous lawsuits against the company, and they will be temporarily delayed.

RUNNING OUT OF CASH AND RUNNING HIGH LEGAL FEES

American Apparel’s net losses reached nearly $384 million over the last five and a half years, and its long-term debt totaled about $235 million. The company also faced a $13.9 million interest payment due on October 15. However, as of August 11, it had only $11.2 million in cash. The allegations against the former CEO were so serious and numerous that the company could no longer afford to pay his legal insurance. Charney sued his former company for $100 million for defamation. American Apparel’s legal expenses ran to $3.6 million in the second quarter alone.

NYSE WARNED OF DELISTING

The New York Stock Exchange warned American Apparel on September 23 that it did not meet continued listing standards due to its deteriorating financial condition. To remain listed, the company was required to submit a plan to the exchange by October 9 addressing how it intended to regain compliance.

FORMER CEO TERMINATED IN DECEMBER 2014

Charney was terminated in December 2014 following an internal investigation into a string of sexual harassment allegations from employees and former staff. However, according to Howard Davidowitz, CEO of retail consulting and investment banking firm Davidowitz & Associates, Charney was the one who had always secured miracle rescue packages to save American Apparel from the brink of collapse in the past. At the same time, there were numerous protests inside the company against his ouster, which showed his popularity among workers.

WRAP-UP

Paula Schneider, the current CEO, said in an interview that, free of its crippling debt and interest payments, American Apparel could finally put its turnaround plan into action. The fresh financing would reduce American Apparel’s debt to $120 million from $311 million, and its annual interest expense would fall by $24 million. Still, many industry insiders commented that the US simply has too many brands and too many brick-and-mortar stores, all of them chasing sluggishly growing consumer spending. The strong US dollar also puts US retailers at a disadvantage versus foreign retailers.