American Apparel

Michael and I are analyzing a special situation with American Apparel ($APP).  APP secured rescue capital from Michael Serruya and Delavaco Capital on April 26 to help APP avoid filing for bankruptcy.  The company was able to re-negotiate the terms of their debt to avoid default provisions triggered when 2010 financial statements contained a “going concern” clause.  Here are the main points:

• The new investor bought 15.8mm shares at $0.90 per share and has the option to buy another 27.4mm shares at $0.90 within 6 months of the initial investment.  

• As part of the terms of the investment, the CEO of the company has an anti-dilution provision.  If APP reaches stock price performance goals of $3.25 by 2013, $4.25 by 2014, and $5.25 by 2015, the CEO receives a total of 39.7mm additional shares.  

• The company’s 2010 sales were $533mm.  Costs are high in both Cost of Goods and Selling / General & Administrative costs, but with some cost-cutting measures the company may be able to return to profitability.  

• Total debt is well-collateralized:  

Long-Term Debt as of Year End 2010: Total $139mm

Revolving Credit Facility at Bank of America, $75mm, $53.4mm is drawn, due July 2012

Term Loan at Lion, $81.2mm matures Dec 31, 2013

Assets as Collateral for Debt (as of Year End 2010): Total $287.3mm

Cash $7.6mm

Accounts Receivable $16.7mm

Inventory $178mm

Property and Equipment $85mm

• The company may now have enough time to return to profitability before cash runs out.  The current rescue investment is for $15mm immediately plus an additional $25mm over the next 6 months at the discretion of the investor, for a total potential cash infusion of $40mm this year.  Total cash usage for operating activities was $32mm in 2010, although it should be noted that in 2010 the company reduced inventory by $37mm (20%).  

We will be monitoring the situation closely to see if it makes sense as an investment.

-Jen

Comments

[Billy Kane]

Have you seen the new bond issue for $206 million. This should be a game changer.

[Michael Bigger]

Hi Billy,

Thanks for your comment. Yes, I saw. It will allow them to now focus on increasing sales so that manufacturing can operate at better capacity which should improve EBITDA margins. Also, they should be able to reduce inventory by $25mm with the new distribution center.