American Apparel Inc Plunges On Capital Raise Reports

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American Apparel Inc Plunges On Capital Raise Reports
American Apparel

American Apparel Inc (NYSEMKT:APP) is apparently considering a new debt or equity offering, according to The Wall Street Journal, which cites unnamed sources. The clothing company is said to be working with advisers at Peter J. Solomon Co. on the matter.

American Apparel board to hear more in days

According to The Wall Street Journal’s sources, American Apparel Inc (NYSEMKT:APP)’s bankers will provide some options to the company’s board of directors in the next few days. The bankers are determining whether American Apparel will be able to raise more debt under its current credit agreements.

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They are considering whether the company’s ousting of CEO Dov Charney could require it to refinance the loans it already has. American Apparel Inc (NYSEMKT:AAP) also reportedly wants to improve its operational flexibility by bolstering its cash position, according to the report.

American Apparel embroiled in controversy

Earlier this month, American Apparel Inc (NYSEMKT:APP) removed Charney’s chairman title and began the process to fire him as CEO. His contract requires a 30-day resolution period before he can be fired, and the company plans to fire him after that period is up.  Charney has filed suit against the company in an attempt to keep his job.

The executive has raised more than a few eyebrows with the sexual innuendos used in advertisements for American Apparel Inc (NYSEMKT:APP)’s clothing. The sexually suggestive nature of the advertisements became a part of the company’s brand. But the concerns about him don’t stop there.

Board members say Charney misused funds and did not stop the publishing of nude photographs of a former employee. That employee had filed suit against him, alleging sexual harassment and other issues. Charney’s attorney said there’s no basis for those charges. The New York Times also reported this week that Charney had two women video tape him dancing naked, either in a studio or office. One of the two women reportedly asked him to “shake your booty” in the video.

American Apparel may need cash—fast

Last week, American Apparel Inc (NYSEMKT:APP)’s board of directors said the move to fire Charney could cause the company to default on some of its debt. Then on Monday, the company retained Peter J. Solomon to make sure it will be able to access capital “at a reasonable rate” going forward.

The company could have to tap into some cash very quickly if a $9.87 million loan is called in by the lender, Lion Capital, immediately. This event could happen because of the changing of the CEO. If American Apparel Inc (NYSEMKT:APP) must cough up all that cash immediately, it could end up defaulting with multiple other lenders. As of the end of March, American Apparel has dawn down more than half of its revolving credit facility.

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