American Apparel in Talks to Raise Finances

By Dow Jones Business News, 

American Apparel Inc. is in talks to raise new financing from hedge fund Standard General that would allow the company to pay off a loan that came due after it ousted founder Dov Charney, people familiar with the matter said.

Bankers are still working out the terms of the financing from Standard General, which effectively controls 43% of the company's stock, and it is unclear what form it will take, a person familiar with the situation said.

As part of the talks, the two sides also have reached an agreement in principle to replace all of the company's board- -except for its two co-chairmen--with directors who have more industry experience, though no formal agreement has been signed, people familiar with the situation said.

Still unclear is what role Mr. Charney will play at the company going forward. His fate depends on the outcome of an ongoing investigation into his conduct, people familiar with the situation said.

The moves are aimed at resolving a crisis at the company that was set off last month when the board voted Mr. Charney out as chairman and told him he would be fired as president and CEO once a 30-day waiting period called for in his contract has expired.

Critically, the new funds would let the maker of T-shirts, leggings and other casual clothes pay off a $10 million loan to Lion Capital, another investment firm, the people said. Lion had the right to call in the loan if Mr. Charney was removed. The company didn't repay the loan as requested by July 4, and Lion now plans to formally demand repayment, one of the people said.

Additional financing from Standard General would help American Apparel avert a default on a $50 million line of credit with Capital One, which could be triggered if the Lion Capital loan isn't repaid.

Lion Capital had been a reliable lender to American Apparel for five years, an arrangement forged in part through a relationship between Lyndon Lea, one of the fund's founding partners, and Mr. Charney.

Standard General's role at American Apparel expanded late last month when it loaned Mr. Charney funds to boost his stake in the company to 43% from 27% and won voting control over the stock as part of the bargain.

Standard General is awaiting the results of an investigation into Mr. Charney's conduct by FTI Consulting before determining what if any role the founder will play at the company in the future, according to a letter Standard General sent to investors that was reviewed by The Wall Street Journal. If no material wrongdoing is found, Mr. Charney could remain with the company, though perhaps not as CEO, the people said. But in the letter to investors, Standard General said Mr. Charney would serve no role if he is deemed unfit.

American Apparel's board moved to end Mr. Charney's roles running the company over allegations he misused company funds, failed to prevent the publication of naked photographs of a former employee who had sued him for sexual harassment and other actions.

Mr. Charney's lawyer has called the allegations baseless and has filed an arbitration petition to block his dismissal.

American Apparel's board consists of five independent directors, Mr. Charney, an inactive director and two seats controlled by Lion Capital that have remained unfilled.

Write to Suzanne Kapner at

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