American Apparel files for bankruptcy; garments retailer hit by competition and low demand

American Apparel — the Los Angeles-based apparel retail major has filed for bankruptcy protection and joined the rising band of U.S. apparel retailers, which are going bust after being battered by tough competition, ebbing demand from teen shoppers and rising online shopping.

The apparel retailer has reportedly struck a restructuring agreement with its secured lenders to operate its stores and U. S. manufacturing operations uninterrupted. Already companies such as Wet Seal, Cache Inc, Deb Shops, Delia*s and Body Central Corp have filed for bankruptcy in 2014.

Under the agreement, the secured lenders will provide about US$90 million (AU$126.36 million) as debtor-in-possession financing and inject US$70 million (AU$98.8 million) as new capital. American Apparel expects to complete the restructuring within six months, reported Reuters.

The retailer also expects to cut its debt to $135 million (AU$189 million) from the existing US$300 million (AU$421million), as the deal will eliminate more than US$200 million (AU&280 million) of bonds in exchange for equity in the reorganised company.

“By improving financial footing, we will be able to refocus our business efforts on the execution of our turnaround strategy," Chief Executive Paula Schneider said in a statement.

Troubled legacy

American Apparel was founded by Dov Charney in 1989 with 'Made in America' mantra. It excited young shoppers. But it went into disarray after the company threw him out in December for alleged misconduct.

Charney hit back with an array of lawsuits against the company, alleging defamation, representation in false light and claims of fraud. The Los Angeles-based retailer has not had a profit since 2009.

The New York Stock Exchange recently warned American Apparel that it is at risk of being delisted, due to its impaired financial condition.

Hedge fund in limelight

Meanwhile, American Apparel’s bankruptcy filing also brought spotlight on a not-so-famous hedge fund that is now playing a central role in its restructuring. Standard General LP is a large investor in American Apparel. Its involvement in American Apparel began in June 2014 after it struck a pact with Dov Charney, the company’s controversial founder.

The agreement lifted Charney’s stake in the company to 43 percent but also gave Standard General a stake over a large block of stock.

Under the new deal, the New York-based hedge fund will own US$33 million (AU46.33 million) of American Apparel’s debt, including 20 percent of the company’s debtor-in-possession financing that will keep American Apparel operating through bankruptcy, reported the Wall street Journal.

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