American Apparel seeks to renegotiate debt covenants

American Apparel, the Los Angeles-based retailer whose sexually charged advertising has persistently ignited controversy, is hopeful of a deal to amend loan covenants that threaten to push the company into bankruptcy.

Talks with Lion Capital, the London private equity firm that came to American Apparel's rescue last year, are said to be progressing in a "supportive" manner as a deadline to renegotiate a $80m (£54m) loan agreement looms.

Lion Capital specialises in investments in consumer businesses and has put money into such famous brands as Jimmy Choo shoes and the restaurant chain Wagamama. Its $80m loan to American Apparel last year, which the retailer used to pay off older debts, came with a 15 per cent interest rate and tough financial conditions.

The retailer said last month that it was close to breaching promises it made that its earnings would not fall below a certain level relative to the size of its debts. If the rule is not altered by the end of this month, the private equity firm has the right to force American Apparel into bankruptcy.

Sources close to the talks said Lion Capital was unlikely to go down that route because it wanted to be seen as a supportive investor, rather than one which bolted at early signs of trouble. The Reuters news agency also reported yesterday that a deal to loosen the debt covenants was near.

American Apparel has expanded rapidly since its was founded 13 years ago by Dov Charney, who is its chief executive. It employs 10,000 people and has 285 shops in 20 countries. However, rivals such as Uniqlo, H&M and Zara have stolen away some of its hip young customers, and American Apparel suffered a 10 per cent decline in same-store sales in the first quarter of this year, despite the upturn in the global economy. Its operating businesses lost $17.6m, more than four times as much as in the same three months of 2009.

Lion Capital refused to comment. If it does agree to change the debt covenants, it will be the second time this year. Some investors are asking whether the board ought to bring in more executives to back Mr Charney.

"Wall Street worries constantly about control of this company," said Eric Beder, an analyst at Brean Murray Carret. "You have a very young chief financial officer, you have compliance issues, you have a company that burns through capital. Their valuation would be higher if the Street had confidence in their business execution."