Why American Apparel May Go Bankrupt

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American Apparel (NYSE: APP), already hammered by the dismissal of CEO and founder Dov Charney, may not meet the covenants of key loans which the retailer likely needs to keep maintain operations, at least as a public company. Lenders could support ongoing operations, but this could happen under a pre-packaged bankruptcy.

American Apparel owes Lion Capital $10 million, and $50 million to Capital One. Lion Capital can accelerate its loan if the retailer does not make immediate payment on a portion of it. American Apparel’s only option may be to raise money through a issuance of new stock. Demand my be light. American Apparel’s second largest shareholder, FiveT Capital, recently sold most of its shares. Even if the markets could absorb a share sale, it is too late to put such a transaction together.

Another factor in the company’s future as a public company is that Charney has pledged his voting rights on shares bought on his behalf by Standard General. This means a tug of war between Standard General and firms which hold debt for the future of the American Apparel is likely

The American Apparel share have recently traded as if the company might enter Chapter 11. They sold for only $.53 last month, down from $2 just a year ago.

Creditors often want to take control of a company so that they can enjoy any success in the future. One of the best ways to do that is to push the value of common shares to zero, and remove any benefit of equity ownership. For American Apparel that path becomes more likely by the day.