American Apparel Files for Bankruptcy

Another teen fashion retailer seeks to reorganize under Chapter 11 protection.
Katie Kuehner-HebertOctober 5, 2015

Struggling retailer American Apparel on Monday filed for Chapter 11 bankruptcy protection, and one of the losers stands to be its ousted founder, Dov Charney.

The Los Angles company said that it had reached a restructuring support agreement with 95% of its secured lenders, for a plan that would substantially reduce American Apparel’s debt and interest payments through the elimination of more than  $200 million of its bonds in exchange for equity interests in the reorganized company. The deal would provide the company with access to financing during and after its restructuring. Under Chapter 11 protection, American Apparel expects to complete the restructuring within about six months.

“This restructuring will enable American Apparel to become a stronger, more vibrant company,” the company’s chief executive Paula Schneider said in a press release. “By improving our financial footing, we will be able to refocus our business efforts on the execution of our turnaround strategy as we look to create new and relevant products, launch new design and merchandising initiatives, invest in new stores, grow our e-commerce business, and create captivating new marketing campaigns that will help drive our business forward.”

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Under the restructuring support agreement, American Apparel’s secured lenders would provide approximately $90 million in debtor-in-possession financing. They have also committed to $70 million of new capital to support the reorganization and recapitalization of the business. As a result of the reorganization, American Apparel’s debt would be reduced from $300 million to no more than $135 million, and annual interest expense would decrease by $20 million.

Neil Saunders, CEO of research firm Conlumino, told Reuters that former American Apparel CEO Dov Charney’s stake in the company would be wiped out by the restructuring, along with the stakes of other shareholders.

“The big loser will be founder Dov Charney, who was fired as CEO in December for alleged misconduct, including misusing company funds and failing to stop a subordinate from creating blog posts that defamed former employees,” Reuters wrote.

American Apparel, which has not made a profit since 2009, joins other struggling teen apparel retailers including Wet Seal, Cache, Deb Shops, Delia*s, and Body Central that have filed for bankruptcy in the past year. Such retailers “have been unable to adjust to changing spending patterns and intensifying competition,” according to Reuters.