American Apparel Disputes Default on Lion Capital Loan

Buying time to repay a loan, American Apparel Inc insisted on Tuesday that Dov Charney is still its chief executive, even though it effectively escorted the scandal-tinged founder out the door last month.

In a company filing, the retailer touted a technicality to dispute Lion Capital's claim that it has defaulted on a $9.9 million loan.

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 declined to comment beyond what it said in Tuesday's filing. A spokesperson for Lion Capital also declined to comment.

The retailer said terms of its credit line barred it from using the funds to pay back Lion Capital, but it was seeking an exception, according to the filing. If its request for the funds is rejected, however, there could be "a material adverse effect" on the company and its business, it said.

American Apparel is in talks with other sources that may help the retailer repay the loan, it added.

Standard General, a hedge fund that acquired a 43 percent stake in American Apparel from Charney, could help the parties reach a deal. The retailer has also hired investment bank Peter J. Solomon to help it provide access to capital.

Failing to pay the loan could trigger default on American Apparel's $50 million credit line with Capital One Business Credit Corp, it had said in a previous filing.

The retailer had more than $250 million in debt but only about $16.7 million in cash at the end of March, according to its latest earnings report.

One of American Apparel's largest shareholders, 1832 Asset Management LP, sold its entire 6.6 percent stake in the company, according to a separate filing on Tuesday. The announcement comes days after FiveT Capital reported reducing its shares to 3.19 percent from about 12.7 percent in April.

A shareholder also sued American Apparel board members Monday for failing to stop Charney's misconduct despite "numerous red flags," according to the lawsuit. The board currently is in talks with Standard General to determine the retailer's future.

American Apparel stock dropped more than 5 percent to close at about 84 cents on Tuesday.

(Reporting by Jeffrey Dastin in New York and Siddharth Cavale in Bangalore; Editing by Jeffrey Benkoe, Jilian Mincer and Tom Brown)