UPDATED- American Apparel Inc. (NYSE: APP) has finally filed for Chapter 11 bankruptcy protection in an attempt to strip itself of crippling debt. As Mergers & Acquisitions has previously reported, the company has been facing huge problems for more than a year, spanning from the ouster of founder Dov Charney to slumping sales, which the brand blamed on lacking enough products to sell. American Apparel’s woes underscore the many challenges retailers contend with today, including being ‘overstored,’ as Mergers & Acquisitions explored in depth in our October cover story. 

The Los Angeles-based retailer, known for t-shirts and $50 spandex leggings, filed a pre-arranged Chapter 11 reorganization plan in the U.S. Bankruptcy Court for the District of Delaware on Oct. 5. American Apparel reached a restructuring support agreement with 95 percent of secured lenders that aims to reduce the company's $300 million in debt by $200 million. Under the deal, American Apparel's lenders (a syndicate that includes New York hedge fund Standard General and others) will provide $90 million in debtor-in-possession loans so that the company can continue operations.

American Apparel has proposed a debt-for-equity swap to reorganize, converting $200 million in senior notes into equity interests in a newly reorganized company, providing that business with $40 million in exit capital, and giving unsecured creditors dibs on a litigation trust and a $1 million cash payment, according to court papers.

“This restructuring is a major step forward and will provide the company with the liquidity needed to execute its transformation strategy, keeping jobs and operations here in America," according to a statement released by lenders Monarch Alternative Capital, Coliseum Capital, Pentwater Capital Management, and Goldman Sachs Asset Management. "The plan filed with the Court reflects our continued investment in the future of an iconic American company, led by a management team in which we have confidence. As owners under the plan of over 90% of the company upon emergence, we look forward to being true partners as the company works to achieve key milestones over the next several months in the revitalization of American Apparel.”

"By improving our financial footing, we will be able to refocus our business efforts on the execution of our turnaround strategy as we look to create new and relevant products, launch new design and merchandising initiatives, invest in new stores, grow our e-commerce business, and create captivating new marketing campaigns that will help drive our business forward," says American Apparel CEO Paula Schneider.

A lack of new and relevant products is one of the factors that sealed American Apparel's fate. Sales declined 17.4 percent in the second quarter because the company didn't have enough new products to sell, American Apparel said in a filing with the U.S. Securities and Exchange Commission.

The bankruptcy filing allows the company to avert a $13.9 million interest payment on notes scheduled for Oct. 15. The retailer announced in July it was implementing $30 million in cost-cutting initiatives, including closing stores and updating its apparel lineup as it tries to shed an overtly sexual image.

American Apparel has been working to distance itself from ousted founder Charney, who formed the Los Angeles-based chain in 1989. Charney has been slapping his brainchild with lawsuit after lawsuit since he was removed from his post in June 2014 and then again in December, amid allegations of behavioral misconduct. A judge recently ruled in American Apparel's favor in one of the suits -- saying the company isn't responsible for fees Charney incurred while defending himself from alleged breaches of an agreement. 

In 2014, Standard General picked up an American Apparel stake and Charney handed the hedge fund his voting power in exchange for an internal conduct review. The process ended in his termination, and overlapped with American Apparel’s fielding of a buyout offer from New York private equity firm Irving Place Capital, according to a source with knowledge of the transaction. 

"Standard General remains committed to helping American Apparel continue its important mission of manufacturing high-quality clothing here in the USA," a representative for Standard General tells Mergers & Acquisitions. "We believe the company’s plan to restructure its balance sheet and bring in fresh capital will help management implement its strategic plan and position the company for long-term financial stability. We are pleased that the company’s lenders have reached a consensual agreement that avoids disruption to American Apparel’s dedicated employees and operations." 

The brand recently received a potential delisting warning from the New York Stock Exchange, which called the retailer's future "questionable."

American Apparel operates about 230 retail and outlet stores in 30 states and 18 countries. For more on the brand, and others who have restructured real estate holdings as part of larger turnarounds, see American Apparel's Potential NYSE Delisting Calls Attention to Challenges Retailers Face.

Jones Day is American Apparel's legal counsel, FTI Consulting is the brand' restructuring adviser and Moelis & Co. is investment banker for the restructuring.

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