American Apparel Inc. (APP) lender Capital One Financial Corp. (COF) favors changing the terms of their credit agreement to let the retailer repay a loan from Lion Capital LLP, according to a person familiar with the situation.
The changes would allow American Apparel to pay the Lion loan in full, which is forbidden by the current terms, said the person, who asked not to be identified because the talks between the lender and the retailer are private.
The agreement with Capital One would also help American Apparel avoid a default and reduce its dependence on Lion, which has been a supporter of ousted Chief Executive Officer Dov Charney. Earlier this week, Lion demanded immediate repayment, saying that its loan went into default when Charney ceased to be the company’s CEO on June 18. American Apparel disputed that claim, saying in a filing that Charney won’t be formally fired until July 19, after a monthlong suspension.
The wrangling among lenders is the latest twist in a saga that began last month when the board told Charney, who was also the chain’s chairman, that he would be terminated because of misconduct that it uncovered in a probe of his conduct. The company alleges that he misused company funds and retaliated against a former employee who sued him, people familiar with the matter have said. A lawyer for Charney has said the board’s reasons for firing him are baseless and that his ouster was illegal.
Mike Sitrick, a spokesman for American Apparel, declined to comment. Michael Bulger, a spokeswoman for McLean, Virginia-based Capital One, declined to comment.
American Apparel fell 5.1 percent to 84 cents at the close in New York yesterday. Shares of the Los Angeles-based company have climbed since Charney’s suspension, gaining 31 percent.
The maker of casual clothing had racked up about $270 million in net losses since 2010 and had to raise capital several times.
The move by London-based Lion threatens to trigger the default of the Capital One credit line, which totals $50 million and has $20 million still available.
Lion decided to seek immediate repayment because it’s worried that the chain is headed in the wrong direction, and if it goes into bankruptcy the loan wouldn’t be paid back because it’s unsecured, a person familiar has said. The firm would have considered maintaining the loan if Charney were reinstated in the short term because he’s integral to the chain’s operations, the person said.
For its part, Capital One agrees with the board’s ousting of Charney, a person said.
Standard General LP, the hedge fund that effectively became the chain’s largest shareholder last month through an investment partnership with Charney, also said this week in a filing that it’s prepared to lend the retailer the capital to avoid defaults that may result in bankruptcy and possibly liquidation of the company.
Standard General isn’t advocating for the return of Charney as CEO, saying its decision depends on the findings of the company’s continuing investigation into his conduct.