American Apparel Inc. has avoided defaulting on a key loan by amending its credit agreement with a lender, but the move came at a price: the company is now required to hit a profit target it had previously sought to eliminate.

The apparel manufacturer and retailer said in a regulatory filing Tuesday that it reached a fifth amendment to a credit agreement with one of its largest lenders, London private equity firm Lion Capital LLP.

Under the new credit terms that were reached Feb. 18, American Apparel has to maintain a minimum consolidated level of earnings before interest, depreciation and amortization for 12 consecutive months. The company has to report consolidated EBITDA of $6.25 million for the 12-month period ending Feb. 28, with that figure rising to $70.8 million for the 12-month period ending Sept. 30, 2013. It must maintain that level of EBITDA indefinitely under the agreement.

Lion Capital agreed earlier this month to temporarily waive the minimum consolidated EBITDA to give American Apparel executives time to negotiate an amendment to its credit agreement. At the time, American Apparel said it was hoping to make the waiver permanent.

The company entered into the original credit agreement in March 2009 with Lion Capital, which has been working with Chief Executive Dov Charney to upgrade the company’s operations and increase sales.

Best known for its basic T-shirts, colorful leggings and sexy ad campaigns, American Apparel has been struggling to recover from a recession-led sales slump, aggravated by the need to hire and train more than 1,000 workers following an immigration inspection in late 2009. It reported a third quarter loss of $9.5 million as sales fell 11 percent to $135 million. Debt at the end of the quarter exceeded $133 million.

Meanwhile, American Apparel said Tuesday that under the amended credit agreement it is required to issue and grant new stock warrants to Lion Capital with a lower exercise price of $1.11. A previous amendment gave Lion Capital options for 16 million shares at $2 each.

Shares closed down 2 cents, or 1.8 percent, to $1.12 on the New York Alternet.

For reprint and licensing requests for this article, CLICK HERE.