American Apparel's Financial Bailout: Just a Finger in the Dike

Last Updated Jun 29, 2010 11:00 AM EDT

British fashion rags are reporting that American Apparel (APP) has successfully renegotiated the terms of its $80 million loan from Lion Capital, without which the company faced a financial meltdown later this week. If true -- there's no official company disclosure on the issue yet -- the move buys American Apparel only a little breathing space in which to turn its finances around.

Just to review, American Apparel would likely have gone bankrupt last year without the Lion loan. Now, Brit fashion mag Drapers reports, Lion has tinkered with the loan covenants to keep American Apparel in compliance, removing a cap on the amount of debt the retailer could have relative to its pretax earnings. Drapers also reports the change wasn't without cost -- the interest rate on the loan got jacked up to 17 percent from its previous 15 percent.

That Lion would cut American Apparel a break on its loan is not a big surprise, since the alternative is to see its investment possibly vanish down the maw of a bankruptcy filing. Giving the cash-strapped company a higher interest rate won't help, but it does signal that Lion is all too aware of the precariousness of the retailer's situation.

The company also got a new investor last week in billionaire Ron Burkle who might offer some financial expertise, but he hasn't had time to start influencing company affairs. And with American Apparel, when one drop-dead deadline is averted, another promptly appears. The company reported last week it has until Aug. 16 to shape up and get back in compliance with NYSE Amex rules or face delisting -- a development that would exacerbate the company's financial tailspin.

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  • Carol Tice

    Carol Tice is a longtime business reporter whose work has appeared in Entrepreneur, The Seattle Times, and Nation's Restaurant News, among others. Online sites she's written for include Allbusiness.com and Yahoo!Hotjobs. She blogs about the business of writing at Make a Living Writing.