American Apparel Can’t Soothe Lenders With Thong Leotards

American Apparel Inc. used to enthrall 16- to 25-year-olds with its neon bike shorts and lace-thong leotards. Now, it’s just trying to raise enough cash to keep creditors at bay for at least six more months.

The retailer sold $30.5 million of stock to cover an interest payment of about $13.4 million due April 15, the Los Angeles-based company said today in a statement. It had $4.9 million of cash and $2.7 million available under a credit pact on Feb. 28.

American Apparel, which hasn’t made money since 2009, is in danger of being delisted as a result of its impaired finances and said it may have to refinance or restructure its debt. The company, whose founder Dov Charney started selling T-shirts while in college at Tufts University, received a waiver from its lenders after it ran afoul of financial requirements associated with a loan and got an amendment yesterday that resets those restrictions.

The equity offering “buys them some time, but it really doesn’t advance the ball strategically,” Craig Johnson, president of Customer Growth Partners, a New Canaan, Connecticut-based retail consulting firm, said in a telephone interview. “It’s almost mystifying that it really avoids the core issue that the company has, which is not just the brand, but the governance.”

After making the April coupon payment in addition to working capital needs, American Apparel will be confronted with a potential cash shortfall by its next interest payment in October.

‘Costly Endeavor’

Earnings last year were hurt by about $14.9 million of costs related to the company’s new distribution center that began shipping in February 2013, according to a March 6 filing with the Securities and Exchange Commission. The transition to the facility reduced the company’s ability to react to consumer trends and caused cost overruns.

“Although this was a painful and costly endeavor it was necessary in order for us to achieve the future productivity and growth potential associated with the American Apparel brand,” Charney said in the filing.

To offset the higher costs, the retailer raised cash by borrowing $5 million under a previous loan agreement at 18 percent interest.

Net Loss

“They’ve secured themselves for the short-term, but they may need to go out and raise more equity if they’re betting on a turnaround in the retail environment,” Poonam Goyal, a retail analyst for Bloomberg Industries, said in a telephone interview from Skillman, New Jersey. “The consumer is watching where they spend their money and they’re really just looking for value.”

American Apparel, which sells $26 T-shirts and floral hats, estimated a net loss of $107 million, or 97 cents a share, in 2013, wider than its deficit of $37 million, or 35 cents, the previous year. Capital expenditures exceeded cash flow from operating activities by $15.2 million for the 12 months ended Sept. 30, according to data compiled by Bloomberg. The company has another $13.4 million interest payment due Oct. 15.

“It’s a very challenging retail environment: consumers are stressed and the discretionary apparel sector is going to face challenges as a result,” Charles O’Shea, an analyst at Moody’s Investors Service, said in a telephone interview.

‘Hail Mary’

Moody’s lowered American Apparel’s rating in November one level to Caa2, which signifies the debt is “subject to very high credit risk.” Standard & Poor’s reduced its rating by two grades last month to an equivalent CCC, citing “operating performance” that was “weaker than expected.”

Last month, the retailer’s bondholders hired advisers as they braced for a restructuring, people familiar with the situation said at the time. They retained the firms Houlihan Lokey and Milbank, Tweed, Hadley & McCloy LLP, the people said.

The company’s $206 million of 13 percent secured notes due in April 2020 rose 8.5 cents on the dollar to 88.5 cents at 10:17 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Those securities yield 16 percent.

Shares sank 14 percent to 51 cents, the lowest since the company began trading publicly in 2007. That’s after a 22 percent decline yesterday, reflecting the stock sale’s dilution of current investors’ holdings. The new shares priced at 50 cents.

American Apparel has confronted cash shortfalls since 2009. It survived them by privately selling shares to Charney and other investors, persuading lenders to amend credit agreements to avoid violating covenants and more recently by ramping up borrowing.

“It’s a Hail Mary” to use equity to turn around the company, Jon Sablowsky, head of trading at Brownstone Investment Group LLC in New York, said in a telephone interview. “We’re viewing this with a grain of salt.”

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