NEW YORK (TheStreet) -- American Apparel's (APP) controversial founder Dov Charney was ousted as chairman on Wednesday, but the company's debt situation may provide more troubles ahead.
Its June 18, SEC filing states that the suspension of Dov Charney as CEO "may be deemed to have triggered an event of default under the Credit Agreement, dated as of May 22, 2013."
Management has remained mum on the specifics of its credit agreements, but has admitted it is working with creditors to amend its covenants. Within these covenants, there must be language that states, if positions of top management are changed, that would constitute an "event" that breaches contract. This is similar to if the company were to unexpectedly raise more debt without telling lenders, which would increase the debt-to-equity ratio and over leverage the company. American Apparel is in the process of getting this part of the covenant amended, but if it is unable to do so, it will default.
The U.S. clothing retailer is known for its over-the-top advertising campaigns, however, the board seems to have had enough with Charney's risque conduct.
In the past, Charney has been fairly open with his sleazy behavior. His exhibitionism has included engaging in a sex act with an employee during an interview with Jane magazine. He was also featured in a company add titled "in bed with the boss."
After a recent investigation into unspecified misconduct, the board finally decided it had seen enough and suspended its current chief executive and chairman for a contractual 30-day waiting period, then plans to fire him.