05 October 2015

American Apparel Files For Chapter 11

One of the big stories of the second half of the 20th century was the demise of the U.S. based manufacturing of clothing.  American Apparel is one of the few that has sought to reverse that trend, but has struggled to do so.  Even after it emerges from bankruptcy, it will be hard pressed to compete.

Today, it filed for bankruptcy under Chapter 11, with a reorganization plan pretty much in hand when it filed and expects to have approved within six months.  The case is In re American Apparel, Case No. 15-12055 in the United States Bankruptcy Court for the District of Delaware.  On Friday, its shares closed at 11.2 cents a share for a market value of $20.5 million, following an announcement in August that it did not have enough cash to last the next twelve months.

It has about $200 million in assets and about $400 million in liabilities.  Secured creditors will provide about $90 million in debtor-in-possession financing and 95% of them have already signed onto the reorganization. The secured creditors group includes "Standard General, Monarch Alternative Capital, Coliseum Capital, Goldman Sachs Asset Management and Pentwater Capital Management, all hedge funds or investment firms specializing in distressed debt."  More than $200 million of unsecured bondholders will be converted to equity.  All shareholders, and probably junior unsecured creditors (if any) as well, will be wiped out.

More than 42% of the stock was held by former CEO Dov Charney who was fired for misconduct in December for reasons include sexual harassment and has lawsuits outstanding against the company. His shares, however, were collateral for hedge fund Standard General which also owns $15 million of bonds from the company, making it the company's biggest creditor before the reorganization, and its biggest post-reorganization shareholder, apart from $70 million in new equity investment in addition to debtor-in-possession financing from secured creditors.

The company has about $600 million in revenues from 8,500 employees at six factories and 230 stores in the U.S. and 17 other countries, but has lost $340 million over the last five years through this year and $45 million so far this year (almost 10% of its sales).  Much of the losses are attributable to interest payments (interest payments will fall $24 million a year under the reorganization), but almost surely not all of the losses are attributable to interest payments, so it will still need to become more profitable after the reorganization.

The company has been unresponsive to consumer demand, producing the same clothes all year around and had relatively high prices relative to its competition.

Mostly from here and here and here.

No comments: