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By Kari Hamanaka from

An American Apparel store.

American Apparel Inc. is hoping bankruptcy and going private will cure its woes.

The retailer, which filed for Chapter 11 protection early Monday, plans to exit bankruptcy in three months. According to court documents filed in Delaware, the financial restructuring will bring the debt load down to $135 million from $300 million, with the annual interest payment slashed to $13 million from $33 million.

In its filing, the retailer listed assets of $199.4 million, and liabilities of $397.6 million.

The question remains whether American Apparel can reignite consumer interest after years of mounting losses. Paula Schneider, chief executive officer, said in a telephone interview that one of the company’s problems with connecting with its consumer base has been a lack of newness on the merchandising side. Schneider was tapped late last year to lead the company and turn the business around following the ouster of founder Dov Charney.

”The company hasn’t had much newness brought in over the last five years,” she said. ”There was tremendous inventory from five years or more. At the end of every season, it would do a seasonal flip, bring back the inventory to the warehouse and then bring it back to the floor the following year. If [consumers] liked what they saw [the first time], they bought it, but they’re not going to buy it again. They became fatigued.

”What we did was cut literally every bit of fabric that we had and put it into new bodies that we thought would sell. It was just 4 percent of inventory, but was 15 percent of sales for spring. People wanted newness. This was a big green sprout for us,” she claimed.

The ceo also said of the company and the merchandising plan going forward: ”The majority of our stores are profitable”_. This is all about product, product, product. If you don’t make great product, people don’t want to buy it, and there’s nothing to count.”

For now, the company still needs time to flush out the old inventory to make room for the new product. That’s in part because a mere 4 percent of total inventory won’t move the needle much.

American Apparel’s problems aren’t unique – although its headline-generating founder and the controversy and attention he’s generated are. AÌ©ropostale and Abercrombie & Fitch are other brands that in recent years have lost their way with their core customer base. Turning around the fortunes of these vertical retailers takes time. American Apparel also has done what Abercrombie did earlier this year, moving away from the sexualized marketing promulgated by Charney and trying to add in more fashion content. The latter in part is a nod to the fast-fashion chains that have attracted the attention of Millennial shoppers.

But an individual familiar with American Apparel’s operations said the company is different from the teen retailers since it has a wider customer base, ranging from a 15-year-old boy to a 35-year-old woman. ”American Apparel is not a teen brand,” the person said, noting that its 5 million social media followers are showing interest and reacting to the newness that’s been injected in recent merchandise offerings.

The company has also added to its design and buying teams to shakeup the merchandising initiatives at the vertical retailer.

Still up in the air is what happens with Charney. He hasn’t given up trying to regain control of the company. And while the prepackaged bankruptcy presumes a plan whereby the company will have control over its exit, there’s always the chance that another entity could come in at the last minute with a competing offer to acquire the company. Could Charney make a comeback, with a backer in place, for a final run at the company he founded in 1989? According to one source familiar with his plans, ”It’s too early to tell.”

As for whether another dark horse enter the race and take control of the bankrupt firm, California Fashion Association president Ilse Metchek said while the bankruptcy gives the company a chance to iron out its strategy, the clock’s ticking for the bankrupt retailer. Metchek raised the possibility of contenders on the sidelines, including private equity and other public firms, although she declined to name names.

”It’s a brand that has more value than its inventory,” Metchek said.

Nevertheless, the bankruptcy ultimately could be considered a good move for the company, which wracked up enormous debt, missed covenants and found its payments ratcheted up higher. ”When you look at the enormous debt amount and the debt structure, it was unsustainable for any business to be paying that much in interest rates,” one industry source said. This individual also said that outside players are weighing their options now that the company’s fate will be played out in bankruptcy court.

”The American Apparel brand is strong, the operations weak”_. The fact that people are fighting to stay involved [is] because there’s some relevance there,” the individual said.

How much relevance will now be seen as American Apparel restructures to get out of bankruptcy. A group of pre-petition lenders that includes funds associated with Standard General, Monarch Alternative Capital, Coliseum Capital, Pentwater Capital Management and Goldman Sachs Asset Management are providing the beleaguered retailer with a $90 million debtor-in-possession financing facility. Upon the retailer’s exit from Chapter 11, the bondholders will have their stake converted into equity in the reorganized company.

The secured lenders, with the exception of Standard General, said: ”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”_. As owners under the plan of over 90 percent 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.”

Standard General executives could not be reached for comment, but the company said in a statement, ””Standard General remains committed to helping American Apparel continue its important mission of manufacturing high-quality clothing here in the USA. 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.”

It wasn’t immediately clear how large an equity stake Standard General would have in the restructured firm. The hedge fund is number one on the list of the top 30 unsecured creditors, holding a $15 million claim. An affiliate, Standard General Master Fund, is number two with an unsecured claim of $9.9 million. Both are listed as term loans. Most of the other creditors have claims for either trade debt or services, and for claims that are far lower in amount. Skadden Arps holds the third-highest claim for legal services at $3.8 million.

Standard General also has control of Charney’s 42 percent equity stake, but that holding will go to zero on the retailer’s exit from Chapter 11. Charney reached out to the hedge fund for financial help when he sought to find a way to take back control of the firm, but the two later had a falling out. One source familiar with the plans would only say that the hedge fund would have a ”small equity stake,” suggesting that it won’t be ”driving the bus” since the other bondholders in the aggregate would have a larger, more controlling stake.

In a court declaration accompanying the bankruptcy petition that was filed by Mark Weinstein, the retailer’s chief restructuring officer, the company’s financial troubles began in 2009 after it began a growth initiative during which it opened 23 additional stores, financed through a combination of debt, lease financing and proceeds from the exercise of purchase rights and issuance of common stock. A personnel loss was sustained after Immigration and Customs Enforcement raided the retailer’s facilities, which resulted in the need to cut more than 1,500 employees, the declaration said. The problems worsened in 2010 as operational and market challenges added to the debt obligations, which resulted in a severe liquidity crisis.

The company in early 2011 began exploring financial options, but then found itself under subpoenas from the U.S. Attorney’s office in Los Angeles and the Securities and Exchange Commission in connection with documents connected with probes by the Federal Bureau of Investigation and the SEC regarding its financial reporting and internal controls, according to the court document. Weinstein said, ”These circumstances seriously damaged the company’s credibility in the credit markets.”

While its liquidity picture improved – a $10.5 million equity infusion helped to stabilize the company – American Apparel still posted a loss in 2011, a year that saw $145 million in legacy, long term debt and annual interest expense of $33 million. Subsequent financing facilities over the years to help it stay afloat saw its debt balloon to $300 million. And, in 2014, a $7 million payment by the company to resolve certain lawsuits against Charney, plus a $4.5 million payment in customs penalties assessed by German authorities for unpaid import taxes, didn’t do anything to help its financial picture. Charney, who at one point left the company he founded and then was rehired in 2012, was put on leave and in December 2014 saw his employment agreement ended for cause.