Lion Capital has asked American Apparel to repay a $10 million loan four years early after the retailer ousted its founder and CEO Dov Charney on June 18, said a source close to the matter Friday.
Allan Mayer, co-chairman of American Apparel's board, says that talks with Lion Capital are ongoing "but if they do decide to call the loan, we have sufficient capital to pay it off."
American Apparel shares rose 30 percent on Friday to close at 97 cents on the American Stock Exchange, the highest level since February.
"People are buying based upon the uncertainty we have right now," Beder said. "I think Wall Street is betting right now that Dov does not come back."
Lion Capital, a British investment firm that focuses on the consumer sector, has made no public statement on the loan.
"Lion is either looking for an exit strategy, or it is looking for Dov to come back," said Eric Beder, an analyst who specializes in retail and consumer products for Brean Capital.
Beder said American Apparel does not have excess stores to close and may need to issue more stock to pay its debt.
Failing to pay the loan to Lion Capital could trigger default on a $50 million credit line with Capital One Financial Corp, which "contains cross-default provisions," according to a company filing.
A spokesperson for Capital One did not immediately answer a request for comment.
The New York Post first reported the news.
In the meantime, the company faces a demand for arbitration that Charney's lawyer filed Monday with the hope of restoring Charney as the company's chief.
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