The future of American Apparel hangs in the balance.
The retail company headed into the July 4 weekend in discussions with Lion Capital, having passed a deadline to repay the lender a $10 million loan, according to three people with knowledge of the situation.
Lion Capital, a British private equity firm that once owned Jimmy Choo, has indicated it is ready to take legal measures to ensure that American Apparel makes the payment, pending last-minute negotiations with one of the clothing company's most important shareholders, the hedge fund Standard General, according to one person with knowledge of the situation.
It is the latest turn in a tumultuous two weeks for American Apparel during which its founder, Dov Charney, was fired as chief executive. That activated a clause in the contract with Lion Capital that says if Mr. Charney is no longer at the helm of the business, the loan can be declared in default.
The board said Mr. Charney was fired because of his conduct, and it has started an investigation into his personal and professional behavior. His lawyer has called the accusations baseless and his firing illegal.
Days after his ouster, Mr. Charney, the company's largest shareholder, expanded his stake after striking a partnership with Standard General, which is based in New York. As part of the deal, the investment firm lent Mr. Charney $20 million to build his stake up to 43 percent from 27 percent, with the provision that Standard General has voting control over Mr. Charney's stock.
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Lion Capital has asked to speak directly with Standard General over the weekend about a plan to bring in new leadership at American Apparel, according to one person with knowledge of the matter. If Lion Capital is not confident that Standard General can help turn the company around, it can take legal action to ensure the payment of the loan, that person said.
If American Apparel defaults on its Lion Capital loan, it could lead to the default of a $50 million loan from Capital One. It could also unsettle a group of creditors who bought $210 million worth of American Apparel bonds in 2013.
A person knowledgeable about the situation said that American Apparel and Lion Capital were still negotiating on several fronts, including when repayment would occur and whether American Apparel would simply repay the loan, or include an additional payment like a penalty.
Also at issue are two vacant board seats, which Lion has the right to fill because of warrants it owns in the company. This person said the board seats were part of the continuing negotiations.
Allan Mayer, co-chairman of American Apparel's board, has said that if the loan comes due, the company will be able to pay.
A day earlier, FiveT Capital, an asset management firm in Switzerland that was American Apparel's second-largest shareholder, sold three-quarters of its stake in the company, lowering its holding to 3.19 percent from 12.5 percent. The company cited ''confusion'' over what comes next.
But it also made a nice profit for itself. FiveT bought more than 20 million shares in the company in the spring for 50 cents a share. It sold some of those shares for around 68 cents at the end of June, according to a filing with the Securities and Exchange Commission. On Thursday, the company's shares rose 4 cents, to 87 cents.
American Apparel remains uncomfortably in the public eye. On Thursday, it once again made headlines, this time for a head-in-hand moment.
An employee mistook a picture of the Space Shuttle Challenger explosion for clouds and smoke and posted it on the company's Tumblr page. The company apologized.
''The image was re-blogged in error by one of our international social media employees who was born after the tragedy and was unaware of the event,'' American Apparel said in a statement. ''We sincerely regret the insensitivity of that selection, and the post has been deleted.''