Hipster clothier American Apparel is sinking even deeping into financial distress.
The company said yesterday in an SEC filing that it had received a temporary waiver of a leverage ratio covenant tied to its $80 million credit line from British private equity firm Lion Capital. The company said it expects it may exceed its leverage ratio for the fourth quarter and also warned that it may have already been in breach of the covenant in the third quarter.
American Apparel took out the loan with Lion Capital back in March in order to reduce its borrowing under the Bank of America revolver. Borrowngs under revolving credit facilities tend to be expensive. For those of you who aren’t in credit markets, imagine the difference between the interest on your mortgage and what your pay on credit cards.
The waiver lasts from September 30 until November 14. If American Apparel breaches the covenant with Lion Capital and cannot get another waiver, it will have also breached a covenant in its Bank of America revolving credit agreement. This is a pretty typical set-up with bank loans–they incorporate a breach of any other debt covenant into their own. This would leave American Apparel unable to borrow under its revolver to finance its operations, and force it to seek a distressed debt investor.