American Apparel’s Bankruptcy Filing Is No Surprise To Financial Experts

John Houck - Author
By

Oct. 5 2015, Updated 4:46 a.m. ET

Once revered for its trendy, made-in-American clothing, American Apparel has filed for chapter 11 bankruptcy protection. The company has been plagued with huge debts, sinking sales, employee problems, and ongoing legal battles involving former chairman of the board Dov Charney.

As reported by the Guardian, American Apparel made a restructuring deal with most of its creditors to reduce debts. Lenders will forgive about $200 million of bonds in exchange for equity in the company. This practice is commonly known as a debt-for-equity conversion.

The conversion reduces American Apparel’s annual interest payments by $24 million and overall debt to $120 million. Select bondholders will inject $70 million into the company to help prop it up during the reorganization.

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The deal also required American Apparel to file for bankruptcy. In a recent press release, the company announced the chapter 11 petition.

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“American Apparel has filed with the Bankruptcy Court and expects to obtain approval for various customary motions for immediate relief to allow the Company to make certain necessary payments to employees and suppliers that will permit it to continue operating without interruption during the initial phase of the restructuring.”

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The deal with creditors will keep American Apparel’s Los Angeles manufacturing operation and 130 U.S. stores open. And, as of yet, there has been no announcement of company layoffs. The company’s retail stores outside America will not be affected during the six months restructuring process.

Now known for its notorious sexually explicit advertising, American Apparel started in 1989 as a T-shirt label. From this humble beginning, the company grew to become one of the world’s most admired fashion brands with 260 stores in 19 countries.

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