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Aeropostale Accuses Sycamore Partners of 'Loan to Own' Scheme

Bankrupt U.S. teen retailer Aeropostale filed a motion against its lender, private equity firm Sycamore Partners, in bankruptcy court late on Friday, accusing it of plotting a "loan to own” scheme to push the chain into bankruptcy. Aeropostale asked a U.S. bankruptcy court judge to bar Sycamore from using the $150 million it is owed as credit to bid on the company, which is up for sale in a court-supervised auction. The mall brand retailer also wants the judge to reduce how much Sycamore would be repaid on its loan.

"These claims are without merit and include numerous allegations that are nothing more than irresponsible fabrications,” a Sycamore Partners spokesman said in a statement on Saturday. “This is another in a series of desperate attempts by Aeropostale to try to shift the blame for its disastrous financial performance and the mismanagement of the company by its officers and directors."

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A spokeswoman for Aeropostale said that the company continues to believe that Sycamore “engaged in significant bad acts.” “[Sycamore] will unfairly profit from [its] misdeeds at the expense of” Aeropostale and its other creditors if a judge allows the firm to use the $150 million to bid in the auction, Aeropostale said in the court filing.

Aeropostale says in the filing that Sycamore, through its apparel sourcing company, MGF Sourcing, imposed "onerous" payment terms on the retailer in attempt to hurt its cash position, causing defaults under other credit agreements leading to bankruptcy. Aeropostale had to make merchandise purchases through MGF as a condition of the loan Sycamore affiliates made to the retailer. The retailer also claims that Sycamore traded public Aeropostale shares while it had nonpublic information on the company.

At least five U.S. teen retailers, including Wet Seal LLC and Pacific Sunwear of California Inc, have filed for bankruptcy in the past two years, as the spending habits of young people shift and they visit malls less often. Those bankruptcies have not involved the brutal fight between lender and borrower that Aeropostale’s has.

There will be a hearing on Aeropostale’s claims against Sycamore in August, the Aeropostale spokeswoman said. Aeropostale’s claims against Sycamore wrap up weeks of an investigation by the company into the private equity firm. Sycamore specializes in retail and consumer investments. The firm plans to pursue personal claims against Aeropostale's officers and directors for “fraudulently concealing” a breach of a liquidity covenant, self-dealing and not upholding fiduciary duties, the Sycamore spokesman said.

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