Defaults are technical things. For instance, Argentina is technically in default right now, but nobody really cares just yet, because it has 30 days to figure things out before it is in the kind of default that actually matters.
So it is with American Apparel: When private-equity fund Lion Capital agreed to loan the t-shirt retailer $10 million at a bad credit-card rate, it did so on the understanding that company founder Dov Charney would remain in charge no matter how much he allegedly let things slide financially or how many employees he allegedly sexually harassed. So it was understandably perturbed when American Apparel fired Charney last month.
Last week, Lion—as is its right—asked for its money back. American Apparel’s board, nearing a deal to surrender to hedge fund Standard General, said not right now. And in spite of the fact that Dov Charney likes Standard General enough to give it control of his huge stake in the company, this was not good enough for Lion, which has declared American Apparel in default.
That could be rather a big problem for American Apparel, since being in default on the Lion loan would put it in default on another, much larger loan from Capital One. Now, Capital One is reportedly glad to see the back of Charney, but it apparently didn’t read the fine print on the Lion loan that it tied its own to, because if it had, it might have noticed that Lion has the right to call in a loan if Charney disappears, and then might have reconsidered the clause in its loan that bars American Apparel from paying off the Lion loan in one fell swoop, which essentially gives Lion the power to force the company into default on both loans. (Capital One is reportedly ready to iron out that little wrinkle.)
“But wait!” American Apparel says, with or without adding, under its breath, “until we can close this goddamned deal with Standard General and Capital One.”
”It seems you have misunderstood what happened when we had security escort Mr. Charney from the building. We didn’t fire him. We merely suspended him for a month before we fire him. And that means that, like Argentina, we have 30 days (when he’ll be automatically canned as CEO) to figure this whole thing out. Oh and by the way now we’re going to sue you.”
Lion Capital, a British investment firm, requested repayment after American Apparel said on June 18 it planned to terminate Charney for allegedly misusing company funds and helping spread nude photos of an ex-employee on the Internet. Lion Capital had the right to recall its loan if American Apparel’s management changed.
Not so fast, American Apparel said in the filing. Charney has only been suspended as president and chief executive, and he would retain those titles for a month until July 19.
American Apparel also said in the filing it had the right to seek damages from Lion Capital “for asserting an invalid acceleration” of the date the loan was due. The $9.9 million loan was originally set to mature in 2018.
American Apparel disputes default on Lion Capital loan [Reuters]
American Apparel, hedge fund locked in negotiations [N.Y. Post]
Standard General Confirms Talks With American Apparel [WSJ]
American Apparel Lender Said to Favor Changing Terms [Bloomberg]