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American Apparel eyes private placement to pay down debt

US clothing retailer American Apparel is hoping to reduce its substantial debt burden via a private placement of senior secured notes to US-based institutional investors.     

American Apparel, the US clothing retailer known for its colourful basic clothing and low-budget marketing campaigns, has struggled in recent years with mounting debt and plummeting sale volumes.  In an attempt to  capitalise on appetite for corporate debt in the US, the company is set to offer senior secured notes in a private offering.

The firm confirmed it will use the proceeds to repay corporate debt, and also for general corporate purposes. It is said the launch is subject to market conditions, and will only be offered to qualifying US institutional investors, in accordance with Rule 144A under the Securities Act of 1933.

Since 2010 the manufacturer has made some progress, and the private debt offering suggests management feel sentiment towards the company has improved.

Last week, shares of American Apparel gained more than 14 percent  after the company reported a turnaround to profit in the fourth quarter on higher sales and margins.

 The firm’s fourth quarter and full year 2012 financial results, published last month, were largely positive. Commenting on the annual report, Dov Charney, chairman and chief executive  of American Apparel, said: “Significant sales growth, operating expense control and the acceleration of leverage of our fixed costs allowed us to increase EBITDA performance to $17.8 million for the fourth quarter of 2012 from $9.1 million for the fourth quarter of 2011.”

The company said it incurred higher interest expense in 2012 due to a higher average balance of debt outstanding.“We believe we have demonstrated performance that supports refinancing our debt at a lower cost and we are actively involved in evaluating possible financing alternatives,” added Charney.

He said other expenses in 2012 were $34.4 million versus $14.3 million in 2011. In 2012, interest expense of $41.6 million was offset by an $11.6 million gain on extinguishment of debt related to a first quarter 2012 amendment to the Lion Credit Agreement.

In 2010, the firm swung to a fourth-quarter loss on store-closure expenses and weak sales and reiterated uncertainties about its ability to continue.  That year, the company reported a $86m loss, compared with a $1.1m profit for the previous year. The firm was reported to be filing for bankruptcy as a result of mounting debts of $120 million.  A spokesman at the time said there was “substantial doubt that the company would be able to continue as a going concern.”

American Apparel’s creditors include UK-based private equity retail specialist Lion Capital, which has $82.1 million of outstanding exposure to the company’s debt. Others are understood to include Bank of America Merrill Lynch and the Bank of Montreal.