American Apparel Feeling Aftereffects After Ousting CEO
After American Apparel forced the resignation of CEO Dov Charney, the company now faces not only a public sentiment dilemma with Charney’s actions while on the job, but also a financial crisis.
Creditors are now coming after American Apparel with their teeth showing, demanding that the company repay its debts to them based on the dismissal of Dov Charney. The New York Post reports that one of the main financiers of American Apparel, Lion Capital, has demanded their $10 million loan be repaid immediately.
Lion Capital is a U.K. based investment firm which was perfectly happy with Dov Charney at the helm of American Apparel. Of course, the firm did not know of the lewd behavior that went on behind closed doors. However, this loan, and many other American Apparel loans, automatically default when Dov Charney is not in the CEO position at the company. Lion Capital is the first of many lenders that will undoubtedly be standing at the front door of American Apparel headquarters looking for their dough.
What’s worse for American Apparel is that the company’s debt structure is set up with cross-defaults with their $30 million Capital One line of credit. As the company falls into default with their lenders, the extraordinary line of credit with Capital One goes away which could fold up American Apparel like a deck of poorly placed cards.
“They’re either going to have to add debt at punishing rates, or raise more equity and further dilute shareholders or go bankrupt,” according to New York Post‘s source.
American Apparel could be prime for a takeover as its shares skyrocketed over 41 percent in the last 2 days up to 74.4 cents per share.
While Lion Capital has seemingly called in on it’s debt request, other lenders such as Cerberus Financial has left the door open to the possibility of refinancing American Apparel’s debt to them according to sources.
People close to the situation at Lion Financial have said that CEO Lyndon Lea became frustrated with American Apparel’s board when they seemingly stonewalled the financier instead of responding to questions regarding the investigation before Dov Charney’s dismissal.
The board stated in the termination letter to Charney dated June 18 that the former CEO used “willful misconduct,” which includes allegations that Charney allowed an American Apparel employee to create a blog with naked pictures of fellow American Apparel employee Irene Morales which had filed a sexual harassment lawsuit which accuses Charney of using her as his “sex slave.”
Another financial issue that American Apparel faces is that of Charney’s severance package, which he claims could be as much as $25 million.
[Image Credit: LA Times]
