The American Apparel Saga Continues

American Apparel has been on the watch-list for those who follow distressed retailers for quite a while.  The company, known for its provocative advertising and American-made apparel, has approximately 249 retail stores in the U.S. and 19 other countries.

The company has teetered on the edge of insolvency for years, including in 2010, when its auditor resigned amid claims that it produced unreliable financial statements, and earlier this year when an eleventh-hour investment from Swiss firm FiveT Capital AG provided a short-term respite from the company’s looming liquidity crisis.  The retailer has faced other high profile problems in the past, including allegations that the company and its founder and CEO, Dov Charney, fostered an environment of sexual harassment and misconduct and was otherwise hostile to its employees.

The company’s poor performance continues despite the recent infusion of new capital, leading to a messy and public power struggle for the future of the enterprise.  On June 18, 2014, the board of directors removed Charney as chairman and advised him that as a result of a recent allegation of sexual misconduct, he would be removed as president and CEO “for cause” following the expiration of a 30-day cure period under his employment contract.  Just a few days later, Charney indicated that he would not leave the company quietly.  According to a schedule 13D filing with the Securities and Exchange Commission, Charney indicated that he had been approached by “certain persons … including stockholders of [American Apparel], who expressed support” for him and that he had begun to discuss potential changes to the management and board.

A few days later, American Apparel announced that it hired advisory firm Peter J. Solomon Company “to ensure that we have adequate access to capital in the future at a reasonable cost.”  The reasons for this retention became clear shortly thereafter when Lion Capital, one of the company’s lenders, declared a default under its $10 million loan facility as a result of Charney’s ouster and accelerated the repayment date of the loan to July 4.  Lion Capital then denied the company’s request for a waiver of the default, potentially triggering cross defaults under American Apparel’s asset-based lending facility and senior secured bonds and putting the company in a full-blown crisis.

Further upping the ante, last week Charney borrowed funds from lender Standard General to purchase American Apparel’s equity on the open market.  Charney ultimately increased his ownership to 43% of American Apparel’s common stock in a bid to regain control.  In response, the company adopted a shareholder rights plan (known as a “poison pill”) which would have the effect of diluting Charney’s stock ownership.  It remains to be seen whether Charney’s stock purchase occurred before or after the shareholder rights plan went into effect.

American Apparel is currently engaged in discussions with Standard General and Charney regarding new financing and investment that would bolster the company’s financial condition, including a deleveraging through the retirement of the Lion Capital loan, as well as further modifications to the composition of the board and senior management.  The future of the company, with common stock closing at $0.84 on July 8, 2014, hangs in the balance as these talks progress.

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