American Apparel files for Chapter 11 bankruptcy

December 2015 | DEALFRONT | BANKRUPTCY & CORPORATE RESTRUCTURING

Financier Worldwide Magazine

American Apparel, the manufacturer, distributor and retailer of branded fashion-basic clothing, has voluntarily filed for reorganisation under Chapter 11 of the US Bankruptcy Code in the US Bankruptcy Court for the District of Delaware.

This Chapter 11 reorganisation will enable the company to implement a comprehensive transformation strategy to revitalise its business and brand, while keeping its production and operations in the US. American Apparels’ operations involve approximately 9000 employees and 227 retail stores in 19 countries including the United States and Canada. The company also operates a global e-commerce site that serves over 50 countries worldwide.

American Apparel’s international operations are not affected by the reorganisation in the US.

Throughout the Chapter 11 process, American Apparel plans to continue to operate its business without interruption to customers, employees and vendors. The process includes a restructuring support agreement with 95 percent of its secured lenders to implement a pre-arranged financial restructuring.

This restructuring support agreement, which has been approved by American Apparel’s board of directors, will substantially reduce the company’s debt and interest payments through the elimination of over $200m of its bonds in exchange for equity interests in the reorganised company. American Apparel will also have access to financing during and after its restructuring as part of the restructuring support agreement.

Furthermore, under the agreement, American Apparel’s secured lenders will provide approximately $90m in debtor-in-possession (DIP) financing. These supporting creditors have committed $70m of new capital to support the reorganisation and recapitalisation of the business.

American Apparel anticipates that this financing will be more than sufficient to fund its ongoing operations and pave the way for a successful reorganisation. As a result, the company’s debt will be reduced from $300m to no more than $135m, with annual interest expense decreasing by $20m.

“This restructuring will enable American Apparel to become a stronger, more vibrant company,” said Paula Schneider, American Apparel’s chief executive. “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.”

Alongside the Chapter 11 reorganisation, Ms Schneider is keen to stress that American Apparel plans to continue implementing its strategic plan which is focused on improving product selection, cost management, improving supply chain efficiencies, SKU rationalisation, maximising retail, e-commerce and wholesale opportunities, while continuing to create award-winning marketing campaigns that are positive, inclusive and socially conscious.

“This process will ultimately benefit our employees, suppliers, customers and valued partners,” pledged Ms Schneider. “American Apparel is not only an iconic clothing brand but also the largest apparel manufacturer in North America, and we are taking this step to keep jobs in the US and preserve the ideals for which the company stands. In partnership with our bondholders, we can work towards a new future for the company and concentrate on what matters: making and selling great clothing.”

American Apparel’s legal adviser in connection with the restructuring is Jones Day. The restructuring adviser is FTI Consulting and Moelis & Company is serving as the restructuring’s investment banker.

American Apparel’s restructuring plan is subject to satisfaction of certain customary conditions, including approvals by the Bankruptcy Court. Should the restructuring transactions outlined in the restructuring support agreement prove successful, the company’s existing common stock will be extinguished and the holders of the common stock will not receive any consideration, consistent with legal priorities.

While American Apparel’s reorganisation under Chapter 11 is expected to be complete in less than six months, in the meantime, the company has requested permission from the bankruptcy court to offer bonuses to key employees in an attempt to slow the flow of executives departing the beleaguered retailer.

Fraser Tennant