American Apparel is threatening to blow up like a firecracker before the weekend is over.
The cash-strapped retailer has let a July 4 deadline come and go on the repayment of $10 million in debt, and lender Lion Capital could force the company into bankruptcy unless it gets assurances about its plans by Monday morning, The Post has learned.
Among other guarantees, Lion wants to know whether American Apparel’s entire capital structure will be refinanced by a new investor, New York hedge fund Standard General LP, and what role ousted founder Dov Charney will play in the company, insiders said.
The crisis has already begun to jeopardize American Apparel’s ability to finance its operations, including its access to credit insurance for crucial trade purchases such as the yarn it needs to make fabric, according to one source.
American Apparel officials didn’t immediately respond to requests for comment.
The company’s board made a surprise move to fire Charney on June 18, citing misconduct that his lawyers have denied. The ouster triggered a provision in the debt owed to Lion requiring that Charney remain in control of the company.
As first reported by The Post, Lion denied a waiver on the default last week, a move that could, in turn, trigger a default on the retailer’s $50 million credit line with Capital One.
British-based Lion, headed by shrewd, polo-playing financier Lyndon Lea, has since been locked in tense negotiations with American Apparel’s bankers. The retailer, which had insisted it could pay off the loan, is now subject to penalties and other concessions after missing the Friday deadline, sources said.
Now, insiders say Lion is looking for guarantees from Standard General, which inked a surprise deal with Charney on June 25 to back his bid for a majority stake in the company.
Lion would “like to hear what [Standard General] plans to avert this catastrophe,” according to a source close to the situation.
As of early Saturday afternoon, Standard General had not contacted Lion, the source said.
Officials at Lion and Standard General couldn’t immediately be reached for comment.
Last weekend, American Apparel’s board responded to Charney’s Standard General deal by adopting an anti-takeover “poison pill” provision. But early this week, Charney and Standard General revealed they had assembled a 43-percent stake in the company, within striking distance of a majority that could override the poison pill.
In a July 2 letter to its investors, Standard General said it had “opened a constructive dialogue” with American Apparel’s board to find an “amicable and expeditious resolution” to the crisis.
Armed with voting control over the 43-percent stake it has amassed with Charney, Standard General is looking to revamp the company’s image, which has long been dogged by a series of sex-harassment suits filed against Charney.
As part of the deal, Charney has agreed to leave the retailer’s board, and Standard General’s plans include adding women to the board for the first time, sources told The Post.
“This transaction is not about the founder, nor is it an endorsement of him,” Standard General wrote to its investors. “He will serve no role if he is deemed unfit.”
Nevertheless, sources said pressure from Lion could complicate negotiations. While the firm hasn’t made its demands clear, it has a long track record of giving support to the company under Charney’s direction.
According to one source briefed on the discussions, Lion believes it is likely that it “won’t hear anything convincing [from Standard General] so it will accelerate” its demands for repayment.
“The way I see it, this company is headed for bankruptcy,” the source said. “It has gotten there because of an ill-timed move by the board.”
The default provision on Lion’s loan also entitles the firm to two board seats, but Lion has hesitated over whether to take them, citing concerns about board liability in the crisis, according to a source.