For all the back-and-forth over American Apparel, over Charney’s alleged sexual antics, management’s wrath, and the duelling lawsuits that have followed, neither side is in control. Instead, the bondholders are.
That became apparent yesterday, when the company announced a pre-arranged bankruptcy filing.
If approved in court, creditors led by Monarch Alternative Capital, Coliseum Capital, and Goldman Sachs Asset Management will exchange their bonds for equity and seize ownership of the reorganised company.
The news comes less than two months after the distressed-debt specialists cemented their grip over the retailer by taking a majority stake in its credit line, the cash-strapped company’s only source of funding.
“This is a debt-holder owned company now,” said Charles O’Shea, an analyst who covers American Apparel at Moody’s Investors Service.
Dov Charney Finally Has A Terrible Day That Doesn't Involve Getting Slapped With Sexual Harassment Suits http://t.co/R1h4BD4674— dealbreaker (@dealbreaker) October 5, 2015
Monarch, which manages about $5bn (€4.45bn), is by far the largest bondholder and will have co-founder Andrew Herenstein oversee its investment in American Apparel.
Monarch was also a bondholder in snack-maker Hostess Brands, which ultimately filed for bankruptcy in 2012 and then was liquidated.
It is a remarkable turn of events for Mr Charney, as well as hedge-fund manager Standard General, which seemed to ride to his rescue earlier this year.
With a few shrewd moves, Standard General extracted substantial shareholder voting power from Mr Charney after giving him a loan and used that leverage and some rescue financing to revamp the board in its favour before they fell out.
Now, both have been outflanked by bondholders.
Dov Charney had lofty goals when he founded American Apparel. Today, the company filed for bankruptcy. pic.twitter.com/iIZVf610gD— Timeline (@Timeline_Now) October 5, 2015
With a $13.9m bond payment due on October 15, and few visible signs of improvement as it kept burning through its remaining cash, the bondholders decided to push the company into a restructuring.
There is also no guarantee the business will become sustainable, but cutting its debt obligations will give it a “fighting chance now” to survive, O’Shea said.
American Apparel’s losses have accelerated since the board suspended Charney in June 2014 and fired him in December for alleged misconduct.
Standard General was a little-known player until last year, when it made a splash at American Apparel and RadioShack, another ailing chain. With both companies, it hoped to cash in on the bet that turnarounds were possible.
Neither have gone according to Standard General’s plan. RadioShack filed for bankruptcy protection in February and faced liquidation until Standard General parlayed its role as the largest investor.