American Apparel Claims Charney is Still Its CEO -- Update

American Apparel image
Source: courtesy of American Apparel image
UPDATE: Hedge fund Standard General has reached a preliminary agreement to supply $25 million in financing to American Apparel as the company tries to stabilize its finances and reconstitutes its board of directors, according to a source cited by The Wall Street Journal. The amount would allow the company to pay off the $9.9 million loan from Lion Capital that the lender claims is in default due to a change of control at American Apparel. The stock is up more than 2% on the news, at around $0.86.

The late Hunter S. Thompson once said, “When the going gets weird, the weird turn pro.” He could have been talking about American Apparel Inc. (NYSE: APP) and the continuing story of the company’s ouster of founder and former chairman Dov Charney.

In a filing with the U.S. Securities and Exchange Commission late Tuesday, American Apparel said it “disputes the claim” that Charney is no longer the company’s CEO. The reason this is important is that if Charney has been replaced as CEO, his firing triggers a covenant in the company’s $10 million loan agreement with Lion Capital that puts the loan in default and accelerates repayment of the loan to Lion Capital.

In its filing, American Apparel claims that Charney cannot be replaced as CEO until July 19 and, therefore, the company’s revolving credit facility does not allow the repayment of the loan to Lion Capital. American Apparel said it is seeking consent of its lenders to permit the repayment of the $9.9 million still outstanding on the loan, but that if such permission is not given American Apparel will be in default as of that date and repayment would be accelerated.

That chain of events “could result in a material adverse effect on the Company and its business,” according to the filing. American Apparel said it is “in discussions” with potential sources of capital to replace the Lion Capital loan. Hedge fund Standard General was rumored Tuesday to have agreed to refinance the loan from Lion Capital, now that it controls 43% of the company’s stock.

Now for the weird part. If American Apparel’s view prevails, could it keep Charney as its CEO but put him on permanent paid leave and avoid repaying Lion Capital for months or longer? If that happens, the weird really will have turned pro.

In a related development, Canadian firm 1832 Asset Management has sold its remaining 11.5 million shares in American Apparels, after dumping about 3 million from its holding at the beginning of this year.

Shares of American Apparel fell more than 5% Tuesday to close at around $0.84, in a 52-week range of $0.46 to $2.09. But shares were up more than 5% in the premarket on Wednesday to $0.88.

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