June 27 (Bloomberg) -- American Apparel Inc. creditor Lion Capital LLP is demanding full repayment of its loan to the retail chain after the ouster of Chief Executive Officer Dov Charney last week, two people familiar with the matter said.
Lion, a British investment firm co-founded by Lyndon Lea, is informing American Apparel’s board that it won’t grant a waiver request from the retailer to keep the $10 million loan from going into default, said the people, who asked not to be identified because the decision isn’t public. Lion’s agreement with American Apparel allows the creditor to accelerate payment of the loan if there’s a change of management.
The decision to deny the waiver threatens to trigger a default on a $50 million credit line with Capital One Financial Corp., under which $30 million is drawn, because of cross-default provisions in the agreements. A default also means American Apparel would lose access to $20 million liquidity available under that loan pact. American Apparel warned in a filing last week that not getting the waiver could lead the company to become bankrupt or insolvent.
Capital One is holding its own talks with the company’s management and working to get Lion back on board with granting a waiver, according to one of the people.
Rory King, a spokesman for Lion at MHP Communications, declined to comment. Representatives for Los Angeles-based American Apparel and McLean, Virginia-based Capital One didn’t respond to messages seeking comment.
The process was set in motion when American Apparel replaced its controversial CEO on June 18. The company investigated Charney’s actions this year and found a history of misconduct that ranged from sexual harassment and retaliation to misallocation of corporate funds, a person familiar with the matter said.
Charney is contesting the firing. American Apparel received notice yesterday that the former CEO is seeking arbitration to resolve the matter, the person said. Patricia Glaser, Charney’s lawyer, had warned American Apparel in a letter last week that she would take legal action if the company’s board refused to meet about reinstating him as CEO. The board denied the request, according to the person.
American Apparel has racked up about $270 million in net losses since the beginning of 2010, and the company faced a cash crunch earlier this year that it avoided by selling stock. The shares have lost almost two-thirds of their value over the past year, leaving the retailer with a market valuation of about $130 million. The stock has recouped some of the losses in the past two days. It rose 9.4 percent to 74 cents yesterday in New York.
Allan Mayer, co-chairman of the retail chain, said earlier this week that the company has enough cash on hand to cover the Lion debt or refinance it.
“There’s no need for additional capital,” Mayer said. At the time, the company was working to negotiate a waiver from Lion.
American Apparel also announced this week that it had hired advisory firm Peter J. Solomon Co. to ensure that it has “adequate access to capital in the future at a reasonable cost.” Some of the options may include stock and debt offerings, the person familiar with the situation said.
The New York Post previously reported on Lion’s move to deny the waiver.