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The Deal – American Apparel near bankruptcy – quote by Jerry Reisman

August 13, 2015 Posted in: RPR&C In The Media

The Deal

August 12, 2015

American Apparel near bankruptcy

By Jamie Mason

American Apparel Inc. (APP) could be on the verge of bankruptcy, after the company warned it needs additional financing and potentially breached covenants on its debt.

The Los Angeles retailer, known for making its clothes in the U.S., disclosed in a filing with the Securities and Exchange Commission on Tuesday, Aug. 11 that is in talks with lender Capital One Business Credit Corp. to secure a waiver of potential covenant violations on its debt.

The company’s stock, which trades on the NYSE MKT exchange, closed down more than 37% Wednesday at 13.2 cents, after closing at 21 cents on Tuesday.

According to Jerry Reisman, a bankruptcy and restructuring expert at Reisman Peirez Reisman & Capobianco LLP, “American Apparel is on the verge of bankruptcy.”

The partner on Wednesday said the company is running out of cash, is incurring tremendous legal expenses and also faces a unionization push by workers.

American Apparel has been busy defending itself against approximately 20 lawsuits and administrative actions filed by the company’s founder, former president and ex-CEO Dov Charney, and his associates.

Charney was suspended from his CEO position on June 18, 2014, by the American Apparel board. Charney served as a consultant after being suspended, but that agreement later was terminated. Charney on Dec. 16 officially was fired for cause by American Apparel after the company investigated his alleged misconduct, which included allegations of sexual harassment of employees. FTI Consulting Inc. handled the probe. On Jan. 5, veteran fashion executive Paula Schneider took over as chief executive of American Apparel.

Reisman said American Apparel is a valuable company, and it has a well-recognized valuable brand that is well received in the marketplace. He added Chapter 11 would provide an automatic stay for the lawsuits against the company and would allow American Apparel to reject unfavorable store leases and retain its profitable stores.

Reisman said American Apparel might have a better chance of getting the financing it needs in bankruptcy, in the form of a debtor-in-possession loan, and noted that New York hedge fund and current lender Standard General LP would be a good candidate to provide the loan.

Another restructuring source, who is following the retailer closely, said the dynamics with American Apparel aren’t dissimilar to RadioShack Corp., which sold a large portion of its stores to Standard General in Chapter 11 for $142.09 million in April. The source said that both retailers have high-quality brand value but lost their way and that Standard General might have the appetite to buy American Apparel as well and turn the company around following the sale.

American Apparel has high-quality real estate, with its stores in some of the best locations nationwide, including midtown Manhattan and on the beach in Malibu, Calif., but it is expensive real estate for retailing T-shirts and other cotton clothing, the source noted.

A Standard General representative declined comment Wednesday.

American Apparel, which has 10,000 employees and operates 239 retail stores in 20 countries, has a $50 million secured asset-backed revolving credit facility with Capital One that matures on April 14, 2018, and is priced at either Libor plus 500 basis points or prime plus 400 basis points. The maturity date could be moved up to Jan. 15, 2018, in certain circumstances.

The company had $35.08 million outstanding on the revolver as of March 31 and as of June 30 had $6 million in available borrowing on the revolver.

In the Tuesday SEC filing, the company said it has identified potential noncompliance with certain covenants on its debt and disclosed it is in talks to secure a waiver of any potential defaults from the possible covenant breaches.

While it’s in talks with Capital One, the company also has been “working with its advisers and has begun discussions with certain key financial stakeholders to analyze potential strategic and financial alternatives, which may include refinancing or new capital raising transactions, amendments to or restructuring of its existing indebtedness and other obligations, and consideration of other restructuring and recapitalization transactions.”

In March, the Deal reported Moelis & Co. was advising the company on its capital structure. Officials at Moelis declined to comment on Wednesday.

American Apparel also noted in the SEC filing that Standard General may be buying the Capital One debt.

In July 2014, Standard General provided American Apparel with $25 million in financial support, and the hedge fund entered a standstill and support agreement with American Apparel and Charney. Combined, Standard General and Charney control more than 42% of shares, SEC filings show.

American Apparel also has $209.32 million in 15% senior secured notes. The notes mature on April 15, 2020, and are priced at 15%, of which 2% is payable in kind until April 14, 2018. The company faces a roughly $13.9 million interest payment on the notes on Oct. 15.

In addition, the company has borrowed $15 million under an unsecured credit agreement with Standard General. The unsecured debt is priced at 14% and matures on Oct. 15, 2020. Standard General also took over the company’s $9.865 million term loan, previously held by Lion Capital LLC. (Lion Capital still owns 12% of American Apparel shares.) The loan is priced at 17% and matures on April 15, 2021.

As of June 30, the retailer had $7 million in cash on its balance sheet, the SEC filing said.

American Apparel said in May it was looking to raise up to $10 million in fresh capital through an at-the-market offering facility. If the company sells all of the stock it can under the ATM facility, it would represent 8.7% of American Apparel’s market capitalization.

The company plans to use proceeds from stock sales under the facility for working capital and general corporate purposes.

In July, the company said it had embarked on the next phase of its turnaround plan, which includes cutting roughly $30 million in costs. American Apparel also plans to close underperforming retail locations, streamline its workforce and redesign its fall merchandise line.

The retailer posted an estimated $46 million net loss for the six months ended June 30, compared with a $22 million net loss for the same period in 2014, the Tuesday SEC filing said.

According to the company’s most recent quarterly report, filed with SEC on May 11, American Apparel had $271.28 million in assets and $415.59 million in liabilities as of March 31.

An American Apparel spokeswoman couldn’t be reached for comment.