American Apparel Inc. on Tuesday said that some lenders have agreed to extend a waiver of a covenant on a key credit agreement, but the company still faces the potential for default that could affect its ability to stay in business.
The Los Angeles clothing manufacturer and retailer said in a regulatory filing that it reached agreements on Jan. 31 with Lion Capital and some of its other lenders so that it does not need to maintain a minimum consolidated level of earnings before interest, taxes, depreciation and amortization (EBITDA) from Jan. 31 through Feb. 10.
The company entered into the original credit agreement in March 2009, which required it to maintain a minimum level of profitability. Lion Capital, which has been working with Chief Executive Dov Charney to upgrade the company’s operations, agreed to have the agreement waived last year with the provision that it would start being tested monthly this year.
American Apparel said that it is hoping to make the waiver permanent. If that does not happen and the company cannot meet the agreement’s requirements, it would also trigger a default under a separate credit agreement with Bank of America. Defaulting on either agreement could result in all debts being declared due immediately, the company said, which would affect American Apparel’s ability to continue operations as a “going concern.”
American Apparel has yet to recover from a recession-led sales slump, which was 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.
Shares closed up 6 cents, or 5.8 percent, to $1.09 on the New York Alternet.