July 7 (Bloomberg) -- American Apparel Inc.’s largest investor, Standard General LP, is considering paying off a $10 million loan for the retailer to help it avoid deeper legal disputes, according to a person familiar with the situation.
The loan from Lion Capital LLP has been at risk of default since the chain’s board suspended Chief Executive Officer Dov Charney on June 18 with plans to fire him in 30 days. Standard General may pay Lion so American Apparel can avoid triggering other lenders to call their loans, said the person, who asked not to be identified because the talks are private.
The negotiations are the latest effort to shore up American Apparel, which has posted about $270 million in net losses since 2010 and has been forced to raise capital several times. The company has been in turmoil since a probe by the board uncovered possible misconduct by Charney, including allegations of retaliation against a former employee who sued him and the misuse of corporate funds.
Standard General has been in talks with American Apparel’s board since the New York-based hedge fund entered an investment agreement with Charney last month that gave the partnership a 43 percent stake. These discussions have included the possibility of reshaping the board with new, independent directors, people familiar have said.
The person said yesterday that an agreement might keep one or two board members in place to ensure Los Angeles-based American Apparel maintains its pay levels and manufacturing in the U.S. -- an important thrust of the brand’s marketing.
The talks are fluid and the timing of a completed deal is unknown at this time, the person said, adding that Standard General has not made Charney’s return to the company part of the negotiations.
David Glazek, a partner with Standard General, declined to comment, as did Mike Sitrick, a spokesman for American Apparel. A representative for Lion Capital didn’t respond to a request for comment outside of normal business hours. Charney’s lawyer has said the board’s reasons for firing the company founder are baseless and that his ouster was illegal.
Lion Capital’s terms stipulated the loan would be in default if Charney weren’t CEO of the company. Lion, based in London, will file a notice to accelerate payment of its loan before U.S. markets open tomorrow if it’s not satisfied by Standard General’s plans to turn around the retailer, the person said.
American Apparel, which has previously said it has the funds to pay off the loan, has enlisted FTI Consulting Inc. to investigate Charney further and plans to make the results public at some point.
If Lion goes through with demanding repayment, that may trigger the default of a $50 million credit line from Capital One Financial Corp. because of cross-default provisions in the agreements. Since $30 million of the credit line already has been drawn, American Apparel would lose access to $20 million still available.
Charney has refused to walk away from the company he founded since his ouster. He struck the investment deal with Standard General in which he borrowed about $20 million to buy the shares and used his current stake as collateral. The founder agreed to give up voting rights for his 27 percent stake, another person familiar with the situation has said.
The Wall Street Journal reported yesterday that Standard General was in talks about repaying the loan.
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