Escada out of fashion, declares bankruptcy

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escada storeGerman fashion designer Escada AG's 2,300 worldwide employees -- not to mention the good looks of the celebrities who wear its garments -- were placed in jeopardy today as the clothing maker filed for bankruptcy in Munich Local Court. The company has undergone months of financial negotiations as its market dwindled and its debt soared, culminating in a bid this week to restructure its bonds. Escada needed 80 percent of its bondholders to exchange old notes for new, but failed; only about half would exchange their debt; and hopes to obtain a new bank loan were dependent on a favorable bond-exchange outcome.

Escada's survival will depend on the form its bankruptcy will take. A spokesman told the AFP that "management and employees hope the group will continue to exist," though this is only the latest in a string of German companies, including 128-year-old retailer Arcandor AG, to file bankruptcy. Escada has only been around since 1976, though it has risen quickly to prominence thanks to celebrities like Demi Moore, Hilary Swank, and Katie Holmes who covet its wears. A single gown can cost $14,000.

Escada has a number of high-profile investors, including Russian financier Rustam Aksenenko, who owns 20.9 percent of the stock, and German billionaires Wolfgang and Michael Herz, who hold 12.45 percent each. The brothers are heir to a German coffee retailer, and had invested about 75 million euros in mid-2008 with the hopes of staging a turnaround, following in the footsteps of siblings Daniela and Gunter, who successfully turned around shoe manufacturer Puma five years ago.

Wolfgang and Michael brought in Bruno Saelzer, a former executive at Hugo Boss to stage a comeback from the company's dire straits. Prior management had created much the company's woes, which include poor consumer response to recent designs, and a failed expansion plan. With little time to act and expenses outrunning revenue in an environment where consumers are restricting spending on fashion goods, the Herz brothers found their investment had dwindled to 3 million euros as the stock tumbled to 0.63 euros at the end of trading on the London exchange today.

Complicating the fortunes for Escada is the troubles of CIT Group (CIT), who funds 60 percent of moderate-priced and upscale retailers through "factoring" facilities. As CIT fights its own bankruptcy, it is unable to provide Escada with receivable financing (which requires lower documentation and credit requirements), that is commonly used by clothing retailers. As Carolyn Okomo writes at TheDeal.com, CIT's own threatened bankruptcy "should without a doubt keep the fashion world at the edge of its seat."

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Escada Fashions
FILES - Picture taken on March 17, 2009 shows a woman arranging clothes on a mannequin in a store of German fashion group Escada in Aschheim near Munich, southern Germany. Escada filed for insolvency on August 13, 2009, according to a spokesperson of the district court in Munich. AFP PHOTO DDP/OLIVER LANG GERMANY OUT (Photo credit should read OLIVER LANG/AFP/Getty Images)
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