American Apparel running out of time to save their company
Jul 16, 2015
New York - Here's your weekly reminder that American Apparel has become a struggling enterprise. The cash strapped Los Angeles based retailer is fighting the clock as they try to look for the finances to keep their company afloat. There is currently a lot at play for American Apparel as well.
After their company meeting today, founder Dov Charney, who has been embroiled in an ongoing legal and public relations battle with the company he founded, and his former partner, Standard General, will be free to buy the company. Previously, Charney and Standard General were both forbidden from buying the company under a standstill agreement from last year. However, if you think that it would just be as simple as one of them buying the company and turning it around, you are sadly mistaken.
Last Monday Standard General filed a lawsuit against Dov Charney for alleged breach of contract. As American Apparel continues what appears to be their never ending legal battle, CEO Paula Schneider has attempted to do everything to save the company, including changing their aesthetic, layoff employees, and closing stores, but, it has only worked to so much avail. Bankruptcy is starting to look like the best option for the company.
Standard General could potentially buy American Apparel
There doesn't seem to be anyone on the horizon that would be willing to loan the company money. Around a year ago Standard & Poor's downgraded their credit rating to CCC- and said that "a debt restructuring seems inevitable within the next six months." While the company has surpassed the expected six months time frame they are still struggling financially.
Shareholders of American Apparel will meet for their annual meeting in Chicago, and when they do they will decide whether or not to double the number of shares outstanding to 460 million. If they vote yes, the company could then issue additional shares, that way they'll raise money to fund their turnaround, then dilute the holdings of current investors. If shareholders don't approve the shares the company always has the option of selling preferred stock.
Debt financing wouldn't be a good option for the company, as they already have 220 million dollars in long-term bonds outstanding. To help them make their 13.8 million dollar interest payment, Standard General gave American Apparel at 15 million dollar unsecured loan, but, it probably isn't likely that they will be willing to be so generous again.
Standard General became involved with American Apparel when Charney was fired, and he approached them to help him rebuild his stake in the firm. For a while, it seemed like life would be smooth (or at least less rocky) sailing for American Apparel with Charney back as a consultant and Standard General as an investor, but when Charney was fired again and both parties sued each other it was all downhill from there. If American Apparel has to reorganize in bankruptcy court, Standard General is well within in a position to make a play for more equity. Standard General has made their commitment to the company's success clear, so, it doesn't seem like American Apparel will be going belly up anytime soon, but, it's possible Standard General might be the one holding all the cards.