American Apparel, infamous for its controversial CEO Dov Chamey and its hip, risqué fashions may be facing a possible bankruptcy. American Apparel announced in a securities filing that it “may not have sufficient liquidity necessary to sustain operations for the next 12 months.”
The retailer is in talks to obtain new financing to shore up its struggling operations, which have been hit by slackening demand for its hipster fashions, as well as an immigration crackdown last year that forced the company to dismiss 1,500 undocumented workers at its factory in Los Angeles.
American Apparel is also reeling because of a hiked up interest rate for a $91 million loan it owes Lion Capital. The interest rate increased to 17 percent from 15 percent in June, which is making the retailer’s debt expenditures increase significantly and pushing them closer to a possible bankruptcy. At this point, it isn’t exactly clear how American Apparel would approach restructuring in bankruptcy; but with the retail industry being hit with low sales, tight credit and a changing industry, some are saying that a liquidation in Chapter 7 bankruptcy should not be ruled out as a possibility if the retailer goes down that path. In a Chapter 7 bankruptcy, the company’s assets would be completely liquidated and the proceeds from that liquidation would be distributed to the company’s creditors. And since the company’s brand name has value that could also be sold off in a Chapter 7 bankruptcy. In Chapter 11 bankruptcy American Apparel might be forced to shut down unprofitable stores, cut benefits, reduce salaries or make other changes that could reduce the amount of cash it needs to spend each month, a move that could allow the company to exit any future bankruptcy financially stronger.