American Apparel is scrambling to find new financing as it faces a severe cash crunch and a looming April 30 deadline that could cut off its ability to borrow from banks and cover daily operating costs, which could potentially trigger a Chapter 11 bankruptcy filing.
This story first appeared in the April 4, 2011 issue of WWD. Subscribe Today.
The company has tapped the Rothschild investment bank to shake the money tree for potential investors, but so far there have been no takers, according to company insiders.
“Without an additional injection of cash, the company is done. Somebody has to write a check,” said Howard Davidowitz, chairman of New York-based Davidowitz & Associates, a retail consulting and investing banking firm. “There is no way the company can continue in its present state.”
Dov Charney, chairman and chief executive officer of American Apparel, insisted the company will not file for bankruptcy. “In my opinion, there’s no chance of that. That’s not an option we are going to explore,” he told WWD. “We have a variety of options. We could do a private placement of stock. Or we could use the resources we have. We do $10 million a week in sales.”
However, the company’s financial picture is bleak. Last week, it reported a net loss for 2010 of $86.3 million and an EBITDA loss of $7.4 million. As of Feb. 28, it had just $5.3 million in cash and $1.9 million of availability for additional borrowings on a Bank of America credit agreement and $1.2 million on a Bank of Montreal credit agreement. The company owed $58.2 million on the Bank of America facility and $4 million on the Bank of Montreal facility. Additionally, as of Dec. 31, American Apparel owed $81.2 million to Lion Capital, the London-based private equity firm that rescued the company from its last financial precipice, in 2009.
The company has repeatedly warned in its filings with the Securities and Exchange Commission that it may not be able to continue as a “going concern,” due to its financial circumstances. Charney has spun those warnings as boilerplate language meant to protect investors— but they have also triggered a serious potential covenant breach with lenders.
Both Bank of America and Bank of Montreal require the company to furnish audited financial statements that do not contain a “going concern” qualification by April 30. Unless American Apparel can win waivers for this covenant, its loans will go into default, preventing the company from making any additional borrowings, and the entire debts become immediately due.
In addition, defaulting on the Bank of America credit agreement would trigger a default on the Lion Capital loan.
“It’s a pretty meaningful date,” said Lyndon Lea, a founding partner at Lion Capital, of the potential April 30 covenant breach.
Lea and Neil Richardson, also of Lion Capital, both resigned from the American Apparel board last week, which some observers saw as an indicator that the investment firm is losing faith in Charney. However, Lea countered the move was taken to prevent a conflict of interest for the equity firm.
“As board members, we were responsible for a lot of different interests in terms of shareholders and creditors and stakeholders. Now that we have been talking about raising new forms of liquidity, and we’d have to have a clear point of view on whose interest we were looking out for, that made it more difficult. Something that was good for American Apparel might be bad for Lion Capital,” explained Lea.
Asked why the two joined the board in the first place, Lea responded: “That’s a damn good question. But hindsight is 20/20. We didn’t think there would be these liquidity issues when we first made the investment and the company was doing $80 million in EBITDA.”
Lion Capital may provide additional financing to American Apparel itself, with Lea saying he was “favorably inclined” to doing so but that no final decisions had been made. Lion Capital is exploring various loan and investment options, he added, noting that an additional cash infusion into American Apparel was probably necessary “within weeks.”
Asked his views on a possible American Apparel bankruptcy filing, Lea said he wasn’t concerned for Lion Capital’s funds. “If they do file, I feel okay. I believe the brand has a lot of value, and it’s more than what they owe me,” he noted.
Davidowitz pointed out that any new investors could wrest majority ownership of American Apparel from Charney, who currently holds 62.7 percent of the shares in the company, not inclusive of warrants held by Lion Capital, convertible to 16.8 million shares. “I don’t see how there is any way for him to retain a majority stake in the company. Any major equity investor will want a controlling stake,” said Davidowitz.