American Apparel, Los Angeles, filed for Chapter 11 bankruptcy yesterday in the U.S. Bankruptcy Court for the District of Delaware. The company released a statement, announcing that it is implementing a pre-arranged financial restructuring agreement with 95 percent of its secured lenders.
The restructuring support agreement, which has been approved by American Apparel's board of directors, is an attempt to reduce the company's debt and interest payments through the elimination of more than $200 million of its bonds in exchange for equity interests in the reorganized company. Creditors will supply approximately $90 million in debtor-in-possession financing and $70 million in new capital to support recapitalization of the company.
The company filed with the bankruptcy court and expects to obtain approval for immediate relief, allowing it to make necessary payments to employees and suppliers that will permit continued operations without interruption. American Apparel plans to pay all of its suppliers in full for goods and services provided on or after the date of file, Oct. 5. International operations should not be affected by the restructure in the U.S.
As a result of the restructure, American Apparel's debt would decrease from $300 million to a maximum of $135 million, with annual interest expenses decreasing by $20 million. American Apparel has not announced any store closures or layoffs, and Paula Schneider will remain CEO of the company.
"This restructuring will enable American Apparel to become a stronger, more vibrant company," Schneider said in a press release from American Apparel. "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 new marketing campaigns that will help drive our business forward."
This decision comes after its second-quarter sales fell 17.2 percent, according to Fortune.
Since gaining control of the company, Schneider has worked to revitalize the business and rebrand the company's image, which had been the target of criticism in recent years, especially while former CEO and founder Dov Charney was in charge. The company also had to spend millions on an ongoing legal battle with Charney, whom it ousted in December 2014.
"This is a brand that people care about," Schneider told the Financial Times. "This one deserves to live. If it doesn't live, no other one will because the barriers to entry are simply too high and no one will ever do this again."
American Apparel expects to complete the restructuring within six months.