American Apparel LLC’s secured lenders have now come under the scrutiny of the company’s committee of unsecured creditors in court for what the latter group called an “epic failure.”
It’s a characterization of the nine months between the company’s emergence from its first Chapter 11 bankruptcy filing and its second filed last month, which the committee called a “confoundingly tumultuous period.”
The committee is now pushing back on terms of $30 million in debtor-in-possession financing, $10 million of which was approved for use last month on an interim basis until the judge overseeing the Chapter 22 case makes a final ruling on the matter.
“The nine months between the [company’s] two bankruptcy proceedings were plagued by a string of broken promises to creditors, the complete failure of the [company’s] turnaround strategy and the staggering operating losses that left American Apparel on the brink of liquidation,” attorneys for the unsecured creditors committee said in an objection filed in Delaware Bankruptcy Court.
Secured lenders provided roughly $130 million in exit financing from the first bankruptcy with about $90 million in additional loans after American Apparel emerged from its first Chapter 11 case.
The secured lenders in the first bankruptcy were Standard General, Goldman Sachs Asset Management, Monarch Alternative Capital, Coliseum Capital and Pentwater Capital Management.
The committee raised a red flag on what it sees as potentially improper terms of the debtor-in-possession financing in American Apparel’s second bankruptcy that insulates the secured lender group from “any potential day of reckoning.” It also called senior lender liens on nearly all of the company’s unencumbered assets “excessive and unwarranted protections.”
The committee is also calling for a lengthened investigation period beyond what the current DIP terms in this second bankruptcy provide—60 days—to review the “conduct of the [company’s] lenders and equity holders.” It’s asking for a $50,000 budget to come out of the DIP vehicle to fund the investigation.
The committee hinged its argument on the role the secured lender group had in controlling the business and formulating the company’s reorganization plan in the first bankruptcy.
American Apparel this week asked a judge for permission to shutter nine stores, which it identified as underperformers. The company, which planned to keep its 107 U.S. doors open as it seeks a buyer for the retail business, told the court the likelihood of a buyer for all stores is now unlikely. American Apparel said it’s now in the midst of devising a plan to liquidate and shutter stores that do not get sold in its auction scheduled for next month.
The company’s stalking horse bidder is Gildan Activewear Inc. with a $66 million offer on the intellectual property and potentially some of the manufacturing facilities. Los Angeles sportswear firm Color Image Apparel Inc. emerged last week as another prospective bidder.