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Monday, October 5, 2015

Why American Apparel Filed Chapter 11

Question: Why did American Apparel file Chapter 11?

Answer: Because they earned less than they spent.


If you want a more specific answer, maybe you would like one from the following two choices:

  1. It is almost impossible to successfully make a profit selling commodity clothing that is made in the United States (and please don't try to say that American Apparel is a popular brand name which makes it more than simply a commodity item).
  2. They moved from "manufacturing and wholesaling" to "manufacturing, wholesaling, AND retailing".
Did this all happen because Dov Charney was ordered to chill out?  My guess is the debt & decision making that led to the troubles was already in place prior to all the nonsense that has been going back & forth with company management.

American Apparel, and certain of its domestic subsidiaries have voluntarily filed to reorganize under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). The Company expects to complete the restructuring within approximately six months.

American Apparel, Inc., announced today October 5, 2015 that it has reached a restructuring support agreement with 95% of its secured lenders to implement a pre-arranged financial restructuring.  This reorganization will enable the Company to implement a comprehensive transformation strategy to revitalize the business and brand, while keeping its production and operations in the U.S. Throughout the implementation of this process, American Apparel will continue to operate its business without interruption to customers, employees and vendors.  As you know American Apparel is a vertically-integrated manufacturer, distributor, and retailer of branded fashion-basic apparel.  The restructuring will hopefully help them get their business back on track.

The restructuring support agreement, which has been approved by the Company's board of directors, will substantially reduce the Company's debt and interest payments through the elimination of over $200 million of its bonds in exchange for equity interests in the reorganized Company, and provide the Company with access to financing during and after its restructuring.

American Apparel Reaches Agreement with Lenders to Significantly Reduce its Debt and Interest Payments.

Below are a few key points:
  • American Apparel plans to recapitalize through consensual pre-arranged Chapter 11 reorganization
  • Retail stores, wholesale and U.S. manufacturing operations to continue without interruption; international stores not affected
  • Pre-arranged agreement with 95% of secured lenders will strengthen balance sheet
  • Lenders will provide the company with additional liquidity to ensure financial stability throughout the reorganization process
  • Reorganization enables the implementation of the Company's transformation strategy to revitalize brand
Paula Schneider, American Apparel's Chief Executive Officer, commented, "This restructuring will enable American Apparel to become a stronger, more vibrant company. 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."
Under the restructuring support agreement, American Apparel's secured lenders will provide approximately $90 million in debtor-in-possession (DIP) financing. These supporting creditors have committed $70 million of new capital to support the reorganization and recapitalization of the business. The Company anticipates that such financing will be more than sufficient to fund its ongoing operations and pave the way for a successful reorganization. As a result of the reorganization, American Apparel's debt will be reduced from $300 million to no more than $135 million, and annual interest expense will decrease by $20 million.

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. The Company will pay all of its suppliers in full under normal terms for goods and services provided on or after the filing date of October 5, 2015. American Apparel's international operations are not affected by the reorganization in the U.S.

As of September 30, 2015, the Company had approximately 9,000 employees and operated 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 at http://www.americanapparel.com. In addition, the Company operates a leading wholesale business that supplies high-quality T-shirts and other casual wear to distributors and screen printers.
American Apparel's legal advisor in connection with the restructuring is Jones Day. FTI Consulting serves as its restructuring advisor and Moelis & Company serves as its investment banker for the restructuring.

The restructuring plan is subject to satisfaction of certain customary conditions, including approvals by the Bankruptcy Court. If the restructuring transactions contemplated by the restructuring support agreement are consummated, 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.


American Apparel has set up a toll-free reorganization hotline, accessible to U.S. callers at: +1 (877) 940-7795 and international callers at +1 (614) 779-0360. Customers, employees, or other interested parties who may have questions related to the reorganization may call this hotline for more information. In addition, court filings and other documents related to the restructuring are available on a separate website administered by the Company's claims agent, Garden City Group at www.gardencitygroup.com/cases/AAI

Please support clothing factories that produce garments in the USA.  Visit our USA clothing factory page to find resources.

Thank you for taking the time to read our fashion industry blog post. We hope that you have found this news to be informative. If you have comments or questions, please add your thoughts in the discussion area below.

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