American Apparel files for bankruptcy, operations to continue

(Reuters) - American Apparel Inc, known as much for its sexually charged advertising and controversial founder as for its fashion offerings, filed for Chapter 11 bankruptcy protection on Monday.

The American Apparel factory headquarters is pictured in Los Angeles, California July 7, 2014. REUTERS/Jonathan Alcorn

The company, which has not made a profit since 2009, joins a growing number of teen retailers that have been unable to adjust to changing spending patterns and intense competition from fast-fashion brands such as H&M, Forever 21 and Inditex’s Zara.

The bankruptcy filing could make American Apparel an attractive acquisition target, Lloyd Greif, chief executive of investment bank Greif & Co, said.

There were a lot of private equity firms waiting for the bankruptcy to happen and it allows them to make operational changes that would otherwise be impossible, Greif said.

American Apparel CEO Paula Schneider said the company was not looking to sell at any point soon. “My understanding is that bondholders are interested in owning the company.”

Greif said Leonard Green & Partners, Gores Group, Platinum Equity and Sequential Brands Group among others could be potential buyers.

Platinum Equity and Sequential Brands declined to comment, while the rest were not immediately available.

The big loser from the bankruptcy will be founder Dov Charney, who was ousted 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.

His 42 percent stake in the company, which is held as collateral by New York hedge fund Standard General LP, will be wiped out, along with that of other shareholders.

Standard General is also the company’s biggest creditor, holding $15 million of debt.

Los Angeles-based American Apparel, one of the only clothing retailers still manufacturing in the U.S., said its stores and manufacturing operations would continue to operate normally under a restructuring deal reached with most secured lenders.

The company had identified a small percentage of stores it planned to close, Schneider told Reuters.

Standard General said it remained committed to the company and it was pleased the agreement with lenders would avoid disruption to operations. As of Sept. 30, American Apparel had about 9,000 employees and 227 stores in 19 countries.

“If it can continue to operate through the upcoming holiday season and generate increased holiday revenue, it just might emerge from bankruptcy,” Jerry Reisman, bankruptcy attorney at Reisman Peirez Reisman & Capobianco LLP, said.

However, he also said the company needed new creative direction and additional financing.

American Apparel, which had a market value of $20.5 million as of Friday, said it expected to cut its debt to $135 million from $300 million by eliminating more than $200 million of bonds in exchange for equity.

Secured lenders will provide about $90 million in debtor-in-possession financing, and have committed $70 million of new capital. The restructuring will take about six months.

Other teen retailers that have filed for bankruptcy in the past year include Wet Seal, Cache Inc and Deb Shops.

The American Apparel case is in U.S. Bankruptcy Court, District of Delaware, Case No: 15-12055.

Reporting by Supriya Kurane and Sruthi Ramakrishnan in Bengaluru and Jeffrey Dastin in Chicago, additional reporting by Ramkumar Iyer and Subrat Patnaik; Editing by Ted Kerr and Maju Samuel