American Apparel's Rating Goes Further Into Junk Territory

Moody's Investors Service on Wednesday cut American Apparel's rating one notch further into junk territory, citing a higher likelihood the company will default on its loans.

The downgrade to Caa3, nine notches below investment grade, comes a day after the retailer warned it had about $13 million of available cash—roughly the amount of its October interest payment.

The retailer also said it would miss a regulatory deadline to report second-quarter results after identifying potential violations of the terms of its credit line with Capital One. The company has been staving off bankruptcy amid a protracted battle with ousted founder and former chief executive Dov Charney .

The rating firm said American Apparel remains under review for further downgrade. "We believe that the likelihood of some sort of restructuring ahead of the upcoming October interest payment on the bonds is acute," Moody's Vice President Charlie O'Shea said in a statement.

"The fact that Standard General intends to step into Capital One's shoes as revolver provider by purchasing its interests further heightens the risk of a restructuring as the specter of a loan to own scenario increases, which we believe would significantly impair existing bondholders," Mr. O'Shea said.

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