CORPORATESISSUER IN-DEPTH 6 OCTOBER 2015ANALYST CONTACTSIrina Baron Asst Dir-Research Associate irina.baron@moodys.comGlenn Levine Assc Dir-Sr Research Analyst glenn.levine@moodys.comXian Li Senior Research Analyst xian.li@moodys.comABOUT CAPITAL MARKETS RESEARCHAnalyses from Moodys Capital Markets Research, Inc. (CMR) focus on explaining signals from the credit and equity markets. The publications address whether market signals, in the opinion of the groups analysts, accurately reflect the risks and investment opportunities associated with issuers and sectors. CMR research thus complements the fundamentally-oriented research offered by Moodys Investors Service (MIS), the rating agency.CMR is part of Moodys Analytics, which is one of the two operating businesses of Moodys Corporation. Moodys Analytics (including CMR) is legally and organizationally separated from Moodys Investors Service and operates on an arms length basis from the ratings business. CMR does not provide investment advisory services or products.View the CMR FAQ Contact the CMR team Follow us on TwitterMoodys Analytics markets and distributes all Moodys Capital Markets Research, Inc. materials. Moodys Capital Markets Research, Inc. is a subsidiary of Moodys Corporation. Moodys Analytics does not provide investment advisory services or products. For further detail, please see the last page.EDF Default Case StudyAmerican Apparel Inc.: Another Retailer Succumbs To Rising Debt and Competition Founded in 1989 by Canadian Dov Charney, American Apparel is a clothing manufacturer, designer, distributor, marketer, and retailer based in Los Angeles, California. The companys Expected Default Frequency (EDF') credit measure has signaled a high probability of default for several years. The firms credit metrics improved somewhat from 2011 to mid-2013 as it secured $14.9 million in financing from a group of Canadian investors. However, as sales continued to decline and cash reserves dwindled, American Apparels EDF measure remained elevated, and it has deteriorated at an alarming rate over the past 12 months. The company is due to make a $13.9 million interest payment on October 15, but may struggle to meet this payment as it had just over $11 million cash on hand as of mid-August. As Figure 1 shows, American Apparels one-year EDF increased from 6% in January 2015 to 14% in June. By the time the company filed for Chapter 11 bankruptcy protection, on October 5, its EDF had reached 42%. The company now plans to swap $200 million worth of debt for equity in a restructuring process that is expected to take six months.FIGURE 1. AMERICAN APPARELS ONE-YEAR EDF MEASURE (%)MOODY'S ANALYTICS CORPORATES2 6 OCTOBER 2015 EDF DEFAULT CASE STUDY: AMERICAN APPAREL INC.: ANOTHER RETAILER SUCCUMBS TO RISING DEBT AND COMPETITIONEDF credit measures are continuous measures of a firms default risk. However, some users prefer to analyze credit risk in the language of cr...
