American Apparel, the made-in-America edgy-cool retail store, filed for bankruptcy protection early this morning. The reason for filing for bankruptcy is due to the brand’s huge debt and a continuous decrease in sales, on top of the employee conflicts and drawn out legal battle over sexual harassment in the workplace regarding ousted founder, Dov Charney.
American Apparel filed the Chapter 11 petition, which was approved by the board, in federal bankruptcy court in Delaware. Under the Chapter 11 petition, AA’s secured lenders will help reduce the retailer’s debt through a process known as a debt-for-equity conversion. This means bondholders will swap their debt for shares in the company. This deal also includes extra financing from the participating bondholders, which would then allow American Apparel to keep open its manufacturing operations in Los Angeles and 130 stores across the United States.
The retailer’s overseas operations are expected to be complete within the next six months. Fortunately, these locations will not be affected by this reconstruction process. However, this bankruptcy will wipe out the current stakeholders and then replace them with the company’s creditors to be put in full control, such as Standard General, the fund that is also responsible for the turnaround at RadioShack, which went bankrupt back in February.