American Apparel Inc said on Friday that it had received about $80 million in financing from British private equity firm Lion Capital LLP to pay off a credit facility with SOF Investments LP. The hip clothier's shares soared after the information.

Lion Capital, based in London, will receive notes with a coupon of 15 per cent, as well as detachable warrants equal to 16 million shares, American Apparel said in a statement. If converted, the warrants would equal about 18 per cent ownership of the Los Angeles-based clothing chain.

The proceeds will be used to retire outstanding obligations under a facility with SOF Investments. SOF is an affiliate of New York-based MSD Capital LP, controlled by Michael Dell, chief executive officer of computer maker Dell Inc.

Jacob Capps, a director at Lion Capital, and Neil Richardson, a partner, will join American Apparel's board.

American Apparel, which is known for brightly coloured basics, pro-labour policies and racy marketing, said the deal with Lion Capital involved secured second lien notes maturing December 31, 2013 as well as warrants.

American Apparel said that apart from repaying SOF, it also plans to reduce the balance of its revolving credit facility, repay a portion of a shareholder note, pay fees and expenses related to the deal, and fund its working capital needs.

American Apparel, which manufactures its clothes in downtown Los Angeles, has been growing rapidly, with stores in 19 countries.

"This investment provides us with a long-term solution for our capital structure and an enhanced ability to grow our brand both domestically and internationally over the coming years," chief executive Dov Charney said in a statement.

Under the deal, Lion Capital received warrants for 16 million shares of American Apparel stock with a strike price of $2 a share, or a 5 per cent premium to the trailing 30-day average.

Shares of American Apparel had risen by as much as 68 per cent at close of trading on the NYSE yesterday.

Earlier, the company's shares had tumbled 78.6 per cent due to the weakening retail environment and a lawsuit brought by a former employee against chief executive Charney for allegedly prancing around the workplace in the nude and padding inventory numbers to mislead investors.

Charney was optimistic that Lion Capital's investment is a sign of better things to come for the company. "In light of unprecedented market conditions, we believe Lion Capital's investment serves as a strong endorsement of our company and the tremendous potential of our brand," he said.

He added that the cash infusion gives the company a long-term solution for its capital structure and would help it grow its brand both domestically and internationally.