From its provocative ads to controversy and legal disputes surrounding its founder and former-CEO, in recent years, American Apparel's image and financial standing has suffered. After suffering a reported $340 million in losses since 2010, the leadership team of the embattled company recently announced that it filed for Chapter 11 bankruptcy.
The company's plans to restructure center on the willingness of bondholders to participate in a "process known as debt-for-equity conversion." Through this process, bondholders have agreed to "swap their debt for shares in the company." Under the restructuring plan, an estimated $200 million that is currently held in company bonds would be converted into equity. Additionally, bondholders would provide $160 million in both new liquidity and debtor-in-possession financing.
Members of American Apparel's leadership team blame the company's financial woes on on-going legal battles targeting and against its former CEO, Dov Charney, as well as changes in the priorities and buying habits of the company's targeted demographic. The proposed plan to restructure the company's debts and assets would allow American Apparel to avoid laying off employees and to keep all of its 130 U.S. stores open.
The company's decision to file for Chapter 11 also means that all creditors and pending lawsuits are put on pause which affords members of the leadership team much-needed time and space to sort out important financial issues. Additionally, the decision to file for bankruptcy means the company can work to negotiate, reduce and eliminate its massive amounts of debt.
Provided the bankruptcy court approves American Apparel's plans to restructure, the entire process is expected to be complete in six months.
Source: The New York Times, "American Apparel Files for Bankruptcy," Hiroko Tabuchi, Oct. 5, 2015