The market was already disenchanted with American Apparel Inc. By Feb. 19, the downtown L.A. clothing manufacturer had fallen by 30 percent from the year before. (See page 59.)
Then the Wall Street Journal reported that Dov Charney’s company had enlisted lawyers from New York law firm Skadden Arps Slate Meagher & Flom to work with the company on restructuring. The article also said company bondholders have begun to seek advice from restructuring experts.
The stock dropped 33 percent Feb. 20, landing at 66 cents. It had hit $15.02 in 2007.
American Apparel and Skadden did not return a phone call for comment.
The clothing maker reported that January revenue was down 1 percent compared with the same month last year, with comparable-store sales down 5 percent. Charney, the company’s chief executive, blamed the poor results on bad weather across much of the United States, which he said particularly impacted areas where American Apparel has a lot of stores.
The company has about $240 million in debt. According to the WSJ article, American Apparel has come close to breaching terms of loan agreements in recent quarters.
The company skirted bankruptcy in 2009 thanks to cooperative lenders. Those loans were refinanced last year with a private offering of $206 million in secured notes due in 2020 and a credit facility of $35 million.
According to a November 2013 Securities and Exchange Commission filing, the company nearly broke a loan covenant based on its ratio of debt to earnings. That would have raised its borrowing interest rate from 13 percent to 15 percent. American Apparel said in the filing that it was probable that it would trigger the bump by year’s end.
In a restructuring, a company can negotiate with creditors to reduce the interest rate or extend the time it has to pay its loan back. Creditors sometimes use these talks to forgive debt in exchange for an equity position in the company, which dilutes existing shareholders. Beyond that, some investors could be fretting that any restructuring might result in a Chapter 11 reorganization, which can rough up stockholders.
Also in 2009, American Apparel was hit hard by an immigration raid, which led to reduced inventory and lower sales. In the meantime, questions about the company’s future also include whether the fashion company as it ages can maintain its appeal to the youth market it has always targeted.
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