American Apparel Goes From Bad to Worse

American Apparel is getting close to all kinds of new trouble with a potential loan default.

Jul 9, 2014 at 1:12PM

On the plus side, things could be worse for beleaguered American Apparel (NYSEMKT:APP) -- it could be the beginning of Ragnarok, the Norse end times when the world and gods die. That would really cut into sales. Apart from the appearance of Loki, though, it couldn't get a whole lot worse than it already is. Yesterday, the Associated Press reported that the company has had a $10 million loan called up by Lion Capital, which is claiming that American Apparel defaulted when it changed its management structure by ousting former CEO and founder Dov Charney.

According to Lion Capital, the terms of the loan included language allowing the loan to be recalled if management changed. So when American Apparel ditched Charney on June 18, Lion saw a chance to get off a sinking ship earlier rather than later and called in its $10 million -- the loan was supposed to come due in 2018.

American Apparel's pinch
In an SEC filing, American Apparel disputed Lion Capital's claim, saying that the loan cannot be called up until July 19. American Apparel argues that the loan cannot default until Charney is actually out, and right now he's merely suspended. The company also said that it was in talks with its revolving creditors to allow it to repay the Lion Capital loan early.

If it does default, it could trigger a whole host of bad news, including a default on other loans that the company has. Right now, American Apparel has about $250 million in debt and less than $20 million in cash, making this a very sticky situation. That's probably why investors are fleeing the business. 1832 Asset Management used to own 6.6% of American Apparel, but according to a filing from the retailer this week, it now owns 0% -- no shares.

It's just too much
I like a lot of things about American Apparel, but its business is in a horrific place. Charney's personal shenanigans are a problem, but the bigger problem is that the company has been poorly managed. Sales have fallen as the business has seemingly refused to acknowledge a wider audience, focusing instead on people who already like the brand. That's left it open to competitors mimicking the brand's strong points while offering a wider range of popular products.

American Apparel isn't going to die, I don't think, in part because there are a few level heads still in the room. A report from Reuters has suggested that Standard General, which now controls 43% of the company on behalf of Charney, might be able to help the company out of its current bind.

American Apparel needs to plow through its Charney issues, get this loan repayment sorted out, and then start rebuilding its brand. It needs to broaden its customer horizons a bit and bring in some new folks who may have been tempted away by other companies. If it can do that, then this time next year things should be looking much better. Don't look for a miracle, but don't expect Loki to show up anytime soon, either.

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Andrew Marder has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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