American Apparel has reached a restructuring deal

American Apparel has reached a restructuring deal

US fashion retailer American Apparel has filed for Chapter 11 bankruptcy protection, crippled by US$311m of debt, falling sales, and a number of corporate lawsuits.

The Los Angeles company today (5 October) said it had reached a restructuring deal with 95% of its secured lenders to reduce its debts. This will enable the firm to implement a “transformation strategy”, it said, to “revitalise” the business and brand, while keeping its production and operations in the US.

The agreement will see a reduction of around $200m in bonds in exchange for equity in the company, reducing its $300m debt to no more than $135m and cutting annual interest payments by $20m.

As part of the deal, American Apparel has filed for Chapter 11 Bankruptcy. The company said it expects to complete the restructuring within around six months.

“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,” said CEO Paula Schneider, who took up the role in February, around nine months after the ousting of company founder and former CEO Dov Charney.

Charney has filed several lawsuits against the firm since it dismissed him for alleged misconduct last year. American Apparel counter-sued him for violating his standstill agreement with the company.

It has, however insisted it remains focused on putting the right processes in place to grow the brand after widening its losses in the second quarter and revealing falling sales.

The company has also been strengthening its management team under Schneider with the recent appointment of Thoryn Stephens as its first chief digital officer, and Cynthia Erland as SVP of marketing.

Neil Saunders, CEO of retail analyst Conlumino, believes “a triumvirate of rapidly falling sales, a balance sheet laden with debt, and several ongoing management crises” finally proved too much for the teen retailer.

“Bankruptcy protection is, in our view, the only viable option for American Apparel. Protection would temporarily forestall any pending lawsuits, which will allow management to focus on its turnaround programme rather than fighting legal battles.

“Arguably, the big loser will be founder Dov Charney, who will not only see his legal proceedings delayed but will also find, along with other shareholders, his holding in the company (currently worth some $8.2m) wiped out.”