Los Angeles retailer American Apparel Inc. said Friday that it would get an $80-million infusion from a British investment firm to pay off a problem debt.
Under the agreement, London-based Lion Capital will receive two seats on American Apparel's board of directors and the right to buy an 18% stake in the company.
Known for its racy ads and colorful wardrobe basics, American Apparel said it would use a portion of the loan to retire its existing line of credit with SOF Investments, set to mature this month.
The deal eases the pressure on American Apparel, which in December was forced to negotiate a three-month extension on its debt. Those financial concerns led Adrian Kowalewski, now chief financial officer, to tell another employee in a Dec. 24 e-mail that the company almost had to file for bankruptcy. A copy of the e-mail was furnished to The Times and other media outlets.
Despite the solid reputation of the company as a stylish brand for young adults, a tight credit market made it difficult for American Apparel to find new financing, said Jeff Cohen, a partner at Skadden, Arps, Slate, Meagher & Flom, which served as the company's legal advisor in the transaction.
"Even though the business remains strong and the prospects of it are very strong, they were struggling with these debt maturities," Cohen said. "This gives them breathing room to get back to focusing on and growing the business."
For its investment, Lion Capital will get second-lien notes that mature on Dec. 31, 2013, and carry an interest rate of 15%, American Apparel said. Lion Capital also will receive warrants for 16 million shares of the company's stock at $2 a share; if the warrants are exercised, Lion Capital would own roughly 18% of the company.
Founded in 2004, Lion Capital has invested in several well-known companies including Jimmy Choo, Kettle Foods and Orangina Schweppes. The private equity firm's experience with building consumer brands makes it an "ideal partner," Dov Charney, founder and chief executive of American Apparel, said in a statement.
"In light of unprecedented market conditions, we believe Lion Capital's investment serves as a strong endorsement of our company," he said. "This investment provides us with a long-term solution for our capital structure and an enhanced ability to grow our brand both domestically and internationally over the coming years."
Shares of American Apparel rose $1.01, or 68%, to $2.50 on Friday. Its stock is off 75% in the last year.
This month, American Apparel missed analyst forecasts when it reported that February same-store sales fell 9% compared with the year-earlier period. Until then, the company had been one of the few retailers to consistently post solid monthly sales figures.
The company employs about 10,000 people and operates more than 260 stores in 19 countries.