Monday, October 12, 2009

American Apparel Inc. (Amex: APP): The Unsinkable

APP wins "The Unsinkable Stock" prize of the month.

I wrote about the trendy apparel maker and retailer back in June, when in turned out that a substantial part of their employees were illegal aliens. But it was difficult to ascertain the actual proportion it represented as the company's disclosures are a bit inconsistent.

I did not write about their walking-liability CEO but the Daily Mail steps up to the plate today and minces no words: "The Sleazy Sexual Predator Behind...American Apparel"
"Former sales manager Mary Nelson spoke of a 'reign of sexual terror' and claimed she once attended a meeting where Charney wore nothing but a sock to maintain his modesty - something Charney tried to justify by claiming he was modelling a 'potential product'. "
"According to legal papers filed at Los Angeles Superior Court: ' American Apparel employs many women who have had sex with Mr Charney. These women are commonly referred to as "Dov's girls", "lovers of Dov" or "FOD" (meaning "friends of Dov"). Dov's girls received bonuses from American Apparel, even when their performance created monetary losses.'"
"According to another complainant, Roberto Hernandez, who used to work in IT at American Apparel, Charney conducted meetings in the nude, held business meetings at his LA mansion surrounded by pornographic videos and stored pornographic images on his computer."

There is a lot more in the article.

But that is not why I call them "unsinkable." Last week, their second lien lender, Lion Capital, agreed to a temporary covenant waiver regarding APP's leverage ratios. Normally, this would have been considered bad news, considering that Lion can accelerate the repayment in the event of a default. But APP was down 5%ish on the day, and has drifted and stabilized at 10%ish off.

One would have thought that, with an aggregate view of the companies troubles, it would now be trading at some low option value but Mr. Market thinks otherwise, at least for now.

I would be very curious to see how things play out in mid-November when the waiver expires. Lion's loan terms are sharking at its best: $80 mm at 15%, with $5 mm upfront fee. Lion also got $2 strike warrants for 16 mm shares, or about 18% of the company if converted, and board representation.

Of course, they were not afraid to invest in early March and got their pound of flesh. Audaces fortuna juvat.

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