American Apparel lender Lion Capital demands $10-million loan be paid
The wealthy playboy behind American Apparel Inc.'s latest crisis isn’t ousted Chief Executive Dov Charney. It’s a London financier named Lyndon Lea.
American Apparel told securities regulators Tuesday that Lea’s private equity firm, Lion Capital, has formally demanded repayment of the nearly $10 million it lent to the Los Angeles retailer, which carries a sky-high annual interest rate of 20%.
A default could throw the company into bankruptcy by triggering demands for repayment on additional debts. Those debts include a $30-million loan from Capital One and $206 million in senior secured notes — a kind of corporate IOU.
“It’s like pulling on a thread of a cheap suit, and the whole thing just falls apart at the seams,” said Craig Johnson, president of consulting firm Customer Growth Partners.
American Apparel said it doesn’t believe Lion Capital’s claims are valid and may seek damages against the London investment firm for improperly accelerating payment of the loan, according to a filing Tuesday with the Securities and Exchange Commission.
The company’s directors last month voted Charney out as chairman and chief executive, citing misconduct, including allowing the online posting of nude photos of a former employee who was suing him. The board’s vote immediately suspended Charney from his CEO job, pending an ongoing investigation into his behavior, although a 30-day wait is required for termination under his employment contract.
American Apparel argued Tuesday that Lion Capital can’t call in the loan until July 19, when Charney is slated to be officially fired as CEO, according to the filing.
Representatives for Lion Capital and American Apparel declined requests for comment.
The latest turn of events adds even more uncertainty.
American Apparel is seeking permission from other lenders to pay Lion. If it can get that approval, American Apparel said it would be able to pay off the loan.
But the company warned that if those lenders don’t permit the repayment, other defaults may loom, which “could result in a material adverse effect on the company and its business.” Although American Apparel didn’t name Capital One in its filing, it has previously said that its revolving line of credit with that company could be called because of a provision that links it to the Lion loan.
The move by Lion raised speculation that the private equity firm, whose purchases have included luxe shoe brand Jimmy Choo and Bumble Bee Foods, is interested in taking over the troubled retailer instead.
American Apparel’s interim chief executive, John Luttrell, has said that the company is not interested in a sale.
Lion Capital, which holds the right to buy a 12% stake in American Apparel, has been lending money to the company since 2009, when Charney first turned to Lea for a cash infusion.
Its current lending agreement includes an unusual provision that allows Lion to call its loan if Charney leaves his CEO job.
Jerry Reisman, a corporate law expert who has worked with the retail industry, said Charney himself may have pushed for that requirement to be written into the loan deal.
“Perhaps Dov had that clause inserted into the loan agreement as a covenant to make sure the company didn’t fire him,” Reisman said.
A person familiar with the matter said that Lea has been supportive during Charney’s time as CEO and would welcome his reinstatement.
The two men appear to share a taste for headline-making pursuits.
Charney has talked openly about having relationships with employees and has been sued several times for sexual harassment. He has personally photographed women in provocative poses for company advertisements.
Lea, a former director of American Apparel, has developed a reputation for throwing decadent parties in his California mansion, where sushi reportedly has been served on the bodies of scantily clad women.
Both men are 45, born days apart in January 1969. Both have ties to Canada: Charney was born in Montreal, and Lea went to college at the University of Western Ontario.
Observers say that it’s too early to tell what Lion’s plan is for American Apparel, and whether the investment firm really backs Charney.
Some say the company may be finally throwing in the towel and walking away from a highly risky bet; others say the company may have called in the loan to pressure the board to accept a buyout offer.
“Lion is first and foremost not a lender, they are a private equity firm that makes controlled investments in consumer brands,” said Lloyd Greif, chief executive of investment banking firm Greif & Co. “It’s right up their alley to potentially buy the company.”
The American Apparel board may have few options left.
The company could pursue a bankruptcy, possibly with a buyer already in place to take it over afterward, said Johnson, the consulting firm executive. Other options include trying to sell more shares, liquidating some assets or finding another lender. But Johnson said that, given the chaos, it is highly unlikely a reputable lender would extend a loan.
“Capital One is probably worried about getting out with the money” already lent out, Johnson said. “The question is, is it throwing good money after bad?”
American Apparel could still be saved with funds from Standard General, the New York hedge fund that controls a 43% stake in the company after reaching a deal with Charney.
Standard General said in a letter to investors last week that it plans to introduce new board members and improve the retailer’s management. The firm said it may use its resources to help American Apparel avoid a bankruptcy or liquidation.
But analysts say that scenario is unlikely.
“I would highly doubt that Standard General is in a position to double down the risk by stepping in and effectively taking the place of Lion Capital,” Greif said.
Greif pointed to Standard’s letter as one sign that the firm’s investors didn’t cheer the deal with Charney.
“The only reason you send a letter like that is if they felt compelled to explain their rationale to all of their institutional investors, to explain why they are dealing with a guy like Dov Charney,” Greif said. “That was a defensive posture.”
Even if American Apparel avoids default, it faces other financial problems. The company has lost nearly $270 million in the last four years and is more than $200 million in debt. It will owe bondholders $13.5 million in interest in October.
For his part, Charney has been keeping a relatively low profile. But photos showing a man who appeared to be Charney visiting an American Apparel store in New York popped up Monday on Instagram.
Jen Snow, who snapped the photos of the man wearing a bright blue T-shirt and white pants and shoes, wrote on Instagram that she asked store employees if the man was Charney.
“One nodded ‘yes’ tentatively,” she wrote. “And the other asked me, ‘And how was your day at work?’ with an intonation of palpable discomfort.”
The visit — if it was by Charney — may have violated the terms of his suspension. A termination letter obtained by the social network Whisper said that Charney is not allowed to visit company facilities, including stores or apartments, during his suspension period.
Twitter: @ByShanLi, @byandreachang
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