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Business |ANALYSIS

American Apparel files for bankruptcy: what's next?

By Angela Gonzalez-Rodriguez

Oct 9, 2015

What has been named by many as a chronicle of a death foretold, has finally turned into a reality for American Apparel. After months of speculation, internal wars, financial struggles and heaps of polemic, the apparel retailer has called it a day. Now, the fashion business looks beyond the bankruptcy but, what are its real chance of turning the business upside down?

"American Apparel is in the early stages of an operating turnaround," American Apparel’s attorney, Scott Greenberg of Jones Day, told earlier this week to U.S. Bankruptcy Judge Brendan Shannon at a hearing to approve 90 million dollars in financing to pay bills, including wages.

The largest "Made in the U.S.A" brand filed on Monday for Chapter 11 bankruptcy protection after exhausting all other ways of battling mounting debt, excessive inventory and ever growing costs in legal liabilities tied to its founder Dov Charney.

Barely days after, American Apparel representatives have unveiled that, rather than auctioning off assets, the company will attempt a traditional turnaround under the control of its bondholders.

Under this recovery strategy, additional hedge funds such as Monarch Alternative Capital, will also provide 70 million dollars of new capital over the next six months. The restructuring plan would then give ownership to the Standard General hedge fund, as advanced the retailer’s lawyers.

American Apparel has larger odds to get over bankruptcy than Wet Seal or Cache

"American Apparel is a unique product that can really stand out. People still want to go into stores, feel the fabric and try it on," Burt Flickinger, managing director of retail consultancy Strategic Resource Group, told Reuters on Tuesday.

He explained that, to his mind, the group could have a better chance of bouncing back from bankruptcy than peers like Wet Seal and Cache, which struggled to adjust to changing spending patterns from teens.

Judge Shannon agreed on the uniqueness of American Apparel “It’s not a typical brand. In a lot of ways it’s a cultural decision,” the judge said during Monday´s hearing. “The commitment to American textile manufacturing is hardly typical and is, I assume, part of the message and part of the DNA that the company seeks to share, communicate and rely upon.”

American Apparel to keep its LA factory up and running

For the time being, American Apparel will keep its California manufacturing base, which could help it get new products into US shops before the December holiday season. The company bagged 600 million in net sales in 2014.

The turnaround won’t mean widespread closings of American Apparel’s chain of more than 230 stores, the company’s lawyer said, and American Apparel will stand by its pledge to produce its clothing line in the U.S.

As per the papers presented in the court on Monday, the new management team had a strategy for revamping the ailing business operation, streamlining product offerings and making the most of the brand value. But retail executives were hampered by the lack of free cash to execute their plan, and lenders were wary of stepping in to bail out American Apparel, court papers say, reported the ‘Wall Street Journal’.

Major investors back up American Apparel turnaround plans

Big shareholder Standard General LP, and other investors bought out the senior debt, and provided cash for a bankruptcy reorganisation. Now, as part of the turnaround plan, these 60 million dollars the investors are owed will be rolled into a 90 million dollars bankruptcy loan for American Apparel. The financing, which won interim approval from Judge Shannon on Tuesday, provides the clothing company with 30 million dollars to fund continued operations.

Earlier this week, Monarch Alternative Capital, Coliseum Capital Management LLC, Goldman Sachs Asset Management LP and Pentwater Capital Management LP joined Standard General in backing American Apparel’s new strategic plan.

In total, investors have newly committed 10 million dollars of equity capital plus an additional infusion of 30 million dollars for the company, court papers said, as reported by CNBC.

Meanwhile, the stock – which current value gives American Apparel a 20.5 million dollars market capitalisation - was suspended from trading on Tuesday ahead of their delisting from NYSE MKT.