November 9, 2010 / 11:44 PM / 8 years ago

UPDATE 1-American Apparel expects 2010 loss from operations

* Warns of possible Lion Capital covenant breach in January

* Not in compliance now with Bank of Montreal covenant

SAN FRANCISCO, Nov 9 (Reuters) - American Apparel Inc APP.A, whose sales have been plunging amid a series of problems, said it expects a loss from operations in 2010 and warned it may not be in compliance with a covenant required by a key lender beginning next year.

The retailer and wholesaler, known for its edgy advertising and brightly colored T-shirts, also said that as of September 30 it was not in compliance with a covenant of its agreement with Bank of Montreal (BMO.TO). That required the submission of audited financial statements from the company’s Canadian operations within a certain time frame.

American Apparel said it was “probable” that beginning Jan. 31, it would not be in compliance with a covenant through its main lender, UK-based Lion Capital, that requires a certain EBITDA threshold.

“Based upon the foregoing, the company has classified its obligations outstanding under the Lion credit agreement as current liabilities ...” the company wrote in its U.S. Securities & Exchange Commission quarterly report for the quarter ended Sept 30, published on Tuesday.

Noncompliance with its Lion covenants could spark a default of another credit agreement with Bank of America (BAC.N), American Apparel said.

American Apparel is trying to put its financial house in order as it streamlines operations and considers closing stores. The company has faced a long string of troubles, from immigration probes and the subsequent loss of workers to a persistent sales slump.

Shares of American Apparel closed at $1.14, down 4 percent, on the American Stock Exchange. (Reporting by Alexandria Sage; Editing by Steve Orlofsky)

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