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The 'big loser' of American Apparel's filing for Chapter 11 is Dov Charney

By Vivian Hendriksz

5 Oct 2015

London - American Apparel has found its way into the media spotlight once more as news broke the troubled fashion retailer filed for bankruptcy protection on Monday. The fashion company, which filed for Chapter 11 in the US Bankruptcy Court in Delaware this morning, aims to reorganise its debt - a move set to hit the company's ousted founder, Dov Charney, the hardest.

Creditors, which include American Apparel's secured lenders, have committed 70 million US dollars of new capital to support the reorganization and recapitalization of the business and 90 million US dollars in debtor-in-possession financing. The US fashion retailer is set to reduce its debt from 300 million US dollars to 135 million US dollars and cut its annual interest expense by 20 million US dollars through the withdrawal of 200 million US dollars of bonds in exchange for equity in the reorganized company.

The reorganization plan would maintain the operation of American Apparel's retail stores, wholesale channels as well as its US production plant, without any employee cutbacks according to the New York Times. The company did not mention if the plan included any store closures. The agreement with creditors would also help American Apparel with one if its more pressing matters - a lack of cash, as the company one had 11.2 million US dollars in cash as of August 11, 2015. American Apparel expects to finalize its restructuring scheme within six months, which is still pending approval from the bankruptcy court.

American Apparel's filing for Chapter 11 to eliminate Dov Charney's holding in the company

The main question that remains is where the bankruptcy protection filing leaves founder Dov Charney, who was ousted last year following claims of sexual harassment and misuse of company funds. According to former American Apparel employee, Jan Willem Hubner, bankrupting the company is part of Standard General, the hedge fund said to be leading the company's turnaround, plan to get rid of Charney once and for all as it would wipe out American Apparel's current shareholders, which include Charney.

Neil Saunders, chief executive officer at retail analyst firm Conlumino, agrees with Hubner that the plan would see Charney as the big loser. "Arguably, the big loser will be founder Dov Charney, who will not only see his legal proceedings delayed but will also find, along with other shareholders, his holding in the company (currently worth some 8.2 million US dollars) wiped out." In addition, bankruptcy proceedings would also postpone the numerous lawsuits brought on against the the company by Charney and former employees petitioning for his return.

Hubner stresses American Apparel's filing for Chapter 11 goes against what John Luttrell, the company's chief financial officer promised in a letter sent to all employees on June 19, 2014 which reads: "Our core business—designing, manufacturing, and selling American-made branded apparel—is strong and continues to demonstrate great potential for growth, both in the US and abroad. I expect that this new chapter in the American Apparel story will be the most compelling one yet...The employees of this company have been and continue to be the key to our success."

"The 'new chapter' has lead to bankruptcy over a year," points out Hubner. "And 'the employees' have almost all been removed or have resigned. The people who remain working at American Apparel under new the leadership of Paula Schneider are unhappy and demanding the return of American Apparel's founder."