June 28 (Bloomberg) -- Former American Apparel Inc. Chief Executive Officer Dov Charney entered into a loan agreement with Standard General LP to help raise his stake in the troubled retailer as he contests his firing.
Providing Standard General’s funds are able to purchase at least 10 percent of outstanding shares in the retailer, it will loan Charney funds to buy the stake, charging annual interest of 10 percent, according to a filing yesterday. The loan carries a five-year term and will use Charney’s stock as collateral.
Charney, who was ousted last week, already owns 47.2 million shares, or a 27.2 percent stake, in the Los Angeles-based company, according to the filing. He still plans to engage in discussions with American Apparel and other shareholders and may seek to “implement various plans or proposals intended to enhance the value of his current or future investment,” the filing said.
American Apparel said it replaced Charney after it investigated his 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 has said. The retailer is also facing financial challenges as the termination of Charney’s contract violates terms with creditors, potentially leading to a default.
“Mr. Charney intends to evaluate various alternatives that are or may become available with respect to the issuer and its securities,” the filing said.
Terry Fahn, a spokesman for American Apparel, declined to comment on Charney’s agreement with Standard General.
American Apparel received notice this week that Charney is seeking arbitration to resolve the issue of his firing. His lawyer, Patricia Glaser, had warned the retailer 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.
The retail chain, which started out selling U.S.-made T-shirts and became a byword for hip fashion, has racked up about $270 million in net losses since the beginning of 2010. The company faced a cash crunch earlier this year that it avoided by selling stock.
Lion Capital LLP, a creditor to the chain, won’t grant a waiver request from the retailer to keep its $10 million loan from going into default and is demanding full repayment, according to two people familiar with the matter.
That decision 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 available under that pact.
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.
American Apparel shares have slumped 52 percent over the past year, leaving the retailer with a market valuation of about $169.3 million. The stock jumped 30 percent to 97 cents at the close in New York yesterday and slid 7.2 percent to 90 cents in extended trading.
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