July 8 (Bloomberg) -- American Apparel Inc. said Lion Capital LLP is seeking immediate repayment of a $9.9 million loan, threatening its access to capital as the retailer works to revive profit amid a leadership crisis and mounting legal woes.
The private-equity firm gave notice yesterday that the payment is being accelerated based on a claim that Dov Charney had ceased to be the company’s chief executive officer on June 18, Los Angeles-based American Apparel said today in a filing. The retailer said it disputes that claim and says the loan can’t be accelerated until July 19. The board suspended Charney last month with the intent to fire him within 30 days.
Lion, a long-time lender to the chain and supporter of the 45-year-old Charney, would prefer to see him reinstated as CEO of the company, which he founded and built into a global retail chain, a person familiar with the matter has said. The London-based firm previously denied American Apparel a waiver that would have preserved the loan, which stipulates that the retailer goes into default if Charney is no longer CEO.
American Apparel, a maker of casual clothing, has racked up about $270 million in net losses since 2010 and had to raise capital several times. The removal of the controversial Charney, who has grappled with sexual-harassment allegations and drawn flak for suggestive advertising, has added to the turmoil. If the company were to file for bankruptcy, Lion’s unsecured loan probably won’t be repaid, a person has said.
To add to American Apparel’s troubles, the chain and Charney were sued yesterday by shareholders over claims that directors ignored the CEO’s misconduct, which violated the company’s sexual harassment and discrimination policies.
Standard General LP, which effectively became the retailer’s largest investor last month, is considering providing the funds to pay off the Lion loan, according to a person familiar with the situation. Standard General also has been in talks with American Apparel about reshaping the board with new independent directors, a person has said. David Glazek, a partner with Standard General, declined to comment.
American Apparel has said it has the money it needs to pay off the loan.
Mike Sitrick, a spokesman for American Apparel, declined to comment, as did Shona Prendergast, a Lion spokeswoman.
Lion’s move threatens to 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 the $20 million still available.
The retailer said today that it is in talks with the lenders in its credit facility to permit it to repay the Lion loan, which the terms currently don’t allow.
Standard General said yesterday in a filing that it’s prepared to lend American Apparel capital to avoid defaults that may result in bankruptcy and possibly liquidation of the company.
American Apparel’s shares fell 3.2 percent to about 86 cents at 9:55 a.m. in New York. The stock has lost more than half of its value in the past year.
American Apparel’s board served Charney with a termination letter at a meeting last month, following a probe into his conduct. The investigation found he retaliated against a former employee who sued him for harassment and that he misused corporate funds, a person with knowledge of the matter said. The company has since enlisted FTI Consulting Inc. to investigate Charney further and plans to make the results public at some point.
A lawyer for Charney has said the board’s reasons for firing him are baseless and that his ouster was illegal.
Barring an investigation that finds illegal or immoral activities by the suspended CEO, Lion believes his return would help stabilize American Apparel, given how integral he has been to the company’s operations, a person said.
Charney has refused to walk away from the company. He has thrown in his lot with Standard General, forging a deal that involved borrowing about $20 million to buy more shares and using his current stake as collateral.
Together with Standard General, Charney boosted his stake from 27 percent to 43 percent. Still, the deal meant giving up voting rights, ceding control to Standard General, according to another person familiar with the situation. Standard General also made no assurances that it would push for Charney’s return, and his future role will depend on the outcome of the investigation.
The hedge fund also disclosed in yesterday’s filing that it bought 1.54 million shares on June 30, accounting for 0.9 percent of the chain. That takes its voting power to about 44 percent. It was allowed to add less than 1 percent under the so-called poison pill the board adopted on June 27.
Despite what happens with its loan, Lion has the right to name two people to the board because it has warrants to buy 24.5 million shares that would equal a 12 percent stake in the company, according to public filings. Lion doesn’t plan to name directors, one of the people said.
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