California Apparel News

Is American Apparel sinking under heavy debt?

According to press reports, the Los Angeles apparel company has hired lawyers Skadden, Arps, Slate, Meagher & Flom LLP to provide restructuring advice on $206 million it owes bondholders.

In turn, the bondholders have hired Los Angeles investment bankers Houlihan, Lokey and Milbank, Tweed, Hadley & McCloy LLP to represent them in restructuring negotiations. Restructuring could mean the company borrows more money, if it can renegotiate debt payments, or, as a last resort, files for bankruptcy.

This comes at a time when the T-shirt and garment maker has a $13 million interest payment due April 11, according to documents filed with the Securities & Exchange Commission.

The Wall Street Journal first reported American Apparel was looking to Skadden, Arps, Slate, Meagher and Flom for restructuring advice. Calls seeking comment to American Apparel Chief Financial Officer John Luttrell and to the company’s investment-relations contact, ICR Inc., were not returned.

The company, which went public in 2007, has had a tough time in recent years. It has not had a profit since 2009, recording an $86.3 million net loss in 2010, a $39.3 million net loss in 2011 and a $37.27 million net loss in 2012. In 2009 it had a profit of $1.1 million.

Last year, the company refinanced its debt, issuing $206 million of bonds carrying a 13 percent interest rate and then entered into a $35 million asset-backed credit revolver to pay off higher-interest debt. Later it increased that credit line to $50 million.

The company noted that in the second half of last year, it was having problems with its new distribution center in La Mirada, Calif., which was designed to save the company $3 million to $4 million a year.

Instead it proved to be a $10 million drag on revenue during the third quarter of 2013. Sources close to the distribution center said that when the new center opened, American Apparel Chief Executive Dov Charney insisted he run the facility. He even moved in a bed to work longer hours. But the outcome was disastrous, and he left in late November.

Brean Capital analyst Eric Beder, in a report early this year, had said he expected the last vestiges of the distribution-center problems to be resolved by January.

Some analysts wonder whether Charney, who is also the company’s chairman and owns 43 percent of the stock, will keep his executive positions.

However, he has adroitly weathered tough times in the past. In 2007, U.S. immigration officials visited his large downtown Los Angeles apparel factory and found 1,600 workers, almost one-quarter of the manufacturing facility’s work force, couldn’t show proper documentation to work in this country. Another 200 workers were in question.

The government mandated that the workers be fired and new workers with legal documents be hired. This put a kink in apparel production and resulted in the company having a tough time filling orders.

In March 2009, American Apparel avoided bankruptcy by obtaining an $80 million loan from Lion Capital.