US fashion retailer American Apparel Inc has sold an 18% stake in its business to British private equity firm Lion Capital for $80m, which it will use to pay off some of its debt.

The transaction is expected to close today (13 March) and will provide much-needed relief for American Apparel as it neared the end of a three-month extension of two of its credit facilities.

The Los Angeles based manufacturer and retailer of branded fashion basics has been seeking new financing deals since December, and media reports on Friday said it was close to defaulting on a $16m debt.

"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," American Apparel founder and CEO, Dov Charney, said in a statement.

The clothing company says it will use the investment to pay off the outstanding amounts on its existing second lien credit facility with SOF Investments, an affiliate of MSD Capital.

The remaining proceeds will help reduce its revolving credit facility, repay a portion of a shareholder note, pay fees and expenses related to the transaction, and for working capital purposes.

Under the terms of the deal, Lion Capital receives $80m in secured second lien notes maturing December 31, 2013 with detachable warrants.

It also gets detachable warrants for 16m shares of the company's common stock, which expire in March 2016.

As part of the transaction, Neil Richardson and Jacob Capps of Lion Capital intend to join the board of directors of American Apparel.

American Apparel has invested heavily in recent years to develop into a leading, global apparel brand. It has 10,000 employees, operates more than 260 retail stores in 19 countries, and also has a wholesale arm supplying T-shirts and casual wear to distributors and screen printers.

However, while this expansion was largely driven by soaring sales and profits, it has also incurred huge levels of debt - some estimates put it at around $111.6m.

American Apparel's woes have also been compounded by signs that demand for its products is now starting to slow as the economic downturn bites. Last month its same-store sales fell 9%.