American Apparel Refinances With Private Bond Offering

Proceeds will be used by the specialty retailer to repay and exit its credit facilities.

American Apparel is slated to complete an overhaul of its credit financing this week via a private offering of $206 million in senior secured notes. The proceeds from the offering, which carry an interest rate of 13 percent and come due in 2020, will be used by the specialty retailer to repay and exit its credit facilities with London-based Lion Capital and Boston-based Crystal Financial.

This story first appeared in the April 1, 2013 issue of WWD.  Subscribe Today.

Additionally, American Apparel has secured a new asset-backed revolving credit facility of about $30 million with an unnamed bank.

The refinancing lowers American Apparel’s borrowing costs, extends the maturity date of its debts and improves liquidity for the company, which has been on a long struggle to climb out of a precarious debt hole and stem a flow of red ink. American Apparel may have turned a corner in the fourth quarter ended Dec. 31 when it moved into the black, earning net income of $4.9 million, or 4 cents a diluted share, versus a year-ago loss of $11.2 million, or 11 cents.

American Apparel sales are on an upswing. Same-store sales advanced 13 percent for the full year 2012 while its online sales increased 30 percent. Total sales increased 12.8 percent to $617.3 million, but the company posted a net loss of $37.3 million, or 35 cents a diluted share. In 2011 the company lost $39.3 million, or 42 cents.

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The new notes are issued at 97 percent of par value, which means American Apparel will receive $199.8 million from the offering’s underwriter, which in turn sells the notes to institutional investors. The offering is expected to close on April 4, concurrent with the closing of the asset-backed revolving credit agreement.

Dov Charney, chief executive officer of American Apparel, declined to comment on the refinancing prior to its closing.

The 13 percent interest rate the company is paying is relatively high for a bond, but it allows it to pay off the existing Lion Capital note, which carried an exorbitant 18 percent interest rate. As of Dec. 31, American Apparel owed $137.6 million to Lion Capital, a sum that had ballooned from $80 million in 2009. The approximately $56 million owed to Crystal Financial carried a lower interest rate of about 9.5 percent.

While the Lion Capital financing was onerous, it provided American Apparel with crucial credit at a time the company faced a potential bankruptcy. Lion Capital gained two seats on the American Apparel board in 2009 but gave those up in 2011. The British private equity firm, headed by Lyndon Lea, still holds warrants for about 16 million American Apparel shares, which it could profitably exercise at any point — and Charney and Lea remain on friendly terms. American Apparel shares closed down three cents at $2.17 on Thursday, the last day they were open. The stock has risen from a low of 75 cents a little less than a year ago.

The new bond financing leaves American Apparel with some additional capital to invest in stores and infrastructure. The company plans to expand its retail store base by 60 to 70 units over the next three to five years, up from its current count of 251. E-commerce as a total percentage of sales is forecast to grow to at least 17 percent of its non-wholesale revenue, up from 12.4 percent in 2012.

Standard & Poor’s assigned a “B-” rating to both the new note offering and American Apparel’s overall corporate credit rating. The agency said the company’s outlook is “stable” and that it expects American Apparel’s credit measures to improve modestly, benefitting from increased profitability due to lower raw material costs, a new distribution center and other operating efficiencies.

The bonds have a credit recovery rating of “4,” which indicates an average recovery rate of 30 to 50 percent in the event of a payment default.

“We expect [American Apparel’s] credit protection measures to improve modestly but remain weak for the next one to two years,” said Standard & Poor’s credit analyst Linda Phelps.