Standard & Poor's Rating Services downgraded American Apparel Inc.'s credit rating amid concerns that the troubled retailer will be forced to restructure its debt.
The Wall Street rating agency said the Los Angeles company was roiled by uncertainty in its management ranks and experienced slower-than-expected improvements in its performance, making it difficult to amend or loosen the terms of its credit facility.
S&P lowered American Apparel's corporate credit rating to CCC- from CCC. It also dropped the rating on the company's $200 million in senior secured notes to CC from CCC-.
"The outlook is negative reflecting our belief that a debt restructuring appears inevitable within the next six months," said Ryan Ghose, credit analyst at Standard & Poors.
Ghose predicted that American Apparel will be unable to cover interest payments on its loans for 2014 and 2015, unless the company's financial performance exceeded the agency's forecast.
"The company's profitability is weak and highly volatile," Ghose said.
Standard & Poors said the retailer faces additional uncertainty in its senior management ranks after its board ousted founder Dov Charney as chairman and suspended him as chief executive in June.
Charney is currently working as a paid consultant for American Apparel, pending a company investigation into allegations of inappropriate behavior.
The move by Standard & Poors came a day after American Apparel said a new director had been appointed by its former lender, Lion Capital.
The London private equity firm designated food executive Robert Mintz as the retailer's newest board member according to a securities filing. Lion Capital holds warrants to buy 12% of American Apparel's stock, which allows it to nominate two directors.
American Apparel has recently revamped its board and seated five new members, including its first two female directors. Mintz will expand the board to eight directors.
The board overhaul was part of a deal with New York investment firm Standard General, which controls a nearly 44% stake in the retailer.
Standard General committed up to $25 million in financial assistance to the clothing company. It has already purchased a $10-million loan to American Apparel from Lion Capital, helping the retailer from teetering into bankruptcy.
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