The future of young fashion chain American Apparel has been thrown into question for the second time in just over a year as the retailer struggles to repay its debts to private equity firm Lion Capital.

The Los-Angeles-based retailer said it did not expect to be in compliance with a covenant covering debt to adjusted earnings before EBITA under a credit agreement with Lion Capital.

American Apparel posted an operating loss of $17.6m (£12.2m) compared with $3.9m (£2.7m) the year before and based on existing trends.

American Apparel said in a statement: “The company anticipates that it will not be in compliance with the total debt to adjusted EBITDA covenant under its credit agreement with its second lien lender at June 30, 2010. The company plans to continue to work with the second lien lender to obtain the appropriate amendments prior to the anticipated covenant default; however, the company can provide no assurances that it will be successful in securing such amendments or, if secured, the terms thereof.”

It added: “Additionally, non compliance with financial covenants under the company’s second lien credit agreement constitutes an event of default under the terms of the company’s US revolving credit facility, which could result in the company being unable to make borrowings under its revolving credit facility, and potentially both credit facilities being declared immediately due and payable. There can be no assurance that if either or both of these events were to take place, that the company would be able to obtain the additional sources of liquidity required to continue operations.”

Lion Capital provided American Apparel with $80m (£56m) in financing in March 2009 to help it pay off a $51m (£35m) loan from SOF Investment.

The retailer posted sales of $121.8m (£84.8m), up 6.6%, for the three months to the end of March.

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