By  on August 29, 2014

Standard & Poor’s Ratings Services Friday took a dim view of American Apparel Inc.’s chances of improving its operating performance and resolving questions about its senior management.

The ratings agency lowered its corporate credit rating on the Los Angeles-based vertical retailer to “CCC-minus” from “CCC” and its rating on the company’s $200 million in senior secured notes due in 2020 to “CC” from “CCC-minus.”

Companies with ratings in the “CCC” family are considered to be at risk of failing to meet their financial obligations if business and economic conditions are unfavorable, and those in the “CC” group are considered “highly vulnerable” to nonpayment.

S&P credit analyst Ryan Ghose wrote in a note, “The downgrade reflects our assessment that a debt restructuring appears inevitable within six months, absent unanticipated significantly favorable changes in the company’s circumstances. We believe the company’s financial covenant cushion remains thin and forecast a breach in the fourth quarter unless the company exceeds our base case forecast.”

He added that, based on expectations for earnings before interest, taxes, depreciation and amortization, the company wouldn’t be able to cover its interest payments for this year and next.

He cited both “slower-than-expected improvement” in the firm’s operating performance. “We believe it could be difficult for the company to amend its credit facility to loosen covenants given the uncertainty regarding the company’s senior management level,” he said.

The uncertainty about management has only intensified in recent days. On Thursday, Robert Mintz was designated to fill one of the two vacancies on the American Apparel board reserved for designees of Lion Capital. Mintz, the former chief executive officer of Rupari Food Services, attended school with American Apparel founder Dov Charney, according to a report in the Wall Street Journal.

Charney continues to serve a suspension as ceo of the company, pending an investigation by the board. Charney is serving as a consultant to the company while Standard General controls the voting rights attached to his shares.

As of the end of its second quarter on June 30, the company had $10.2 million in cash, $30.6 million outstanding on its $50 million revolving credit facility and $16.9 million of availability for additional borrowings under the revolver.  It is negotiating terms for an unsecured credit agreement with affiliates of Standard General.

The S&P report cited American Apparel’s “weak and highly volatile” profitability “highlighted by persistent negative same-store sales slightly offsetting positive performance in the company's wholesale business.”

In the second quarter, same-store sales decline 6 percent and online sales were down 3 percent while wholesale sales rose 9 percent. Adjusted ebitda rose to $14.6 million in the quarter from $7.9 million in the prior-year period, and American Apparel estimated adjusted ebitda for the year will be between $40 million and $45 million.

The net loss for the quarter was $16.2 million, or 9 cents a diluted share, less than half the $37.5 million loss logged in the second quarter of 2013. The figures for the quarter include $1.3 million in professional fees tied to the ouster of Charney in June. Sales were flat at $162.4 million.

S&P estimated that, in the event of a default on payments attached to the senior notes, holders could expect a “modest” recovery of between 10 and 30 percent.

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