While Revlon prepares to negotiate its restructuring after filing for bankruptcy last week, the American cosmetics group still does not know the identity of all its main creditors, the result of a bizarre banking error.
In August 2020, Citigroup mistakenly used its own money to repay a $900 million term loan it was administering on behalf of Revlon and which was held by multiple asset management groups. The $400 million holders of the loan quickly repaid the mistaken payment. However, the funds that owned $500 million of the loan, many of whom were furious with Revlon over a previous debt restructuring, kept the money.
In 2021, a federal judge in New York ruled that those keeping the refund were legally entitled to do so. Citi appealed the decision. With the higher court yet to issue a final decision, Revlon faces the possibility that repaid lenders will be forced to return the proceeds and become creditors of Revlon again.
Citi said in the securities filings, however, that if the original decision is upheld, it will assume the $500 million claim against Revlon, pitting the Wall Street titan against a loyal customer. Revlon said it was ready for this potential fight, writing in court documents that it “reserves[s] all rights and defenses with respect to any claims that Citibank may assert against debtors. »
Revlon’s bankruptcy was already complex. In recent months, a liquidity crunch has engulfed the company, long controlled by billionaire Ron Perelman, leaving the court-supervised Chapter 11 process as its only way to stay afloat.
A lawyer representing Revlon said in an initial hearing on Thursday that it was “frustrating” that the fallout from Citi’s error remained unresolved. This pitted the company against loan and bondholders and simmered tensions between various creditors.
According to the company, the bankruptcy filing was not precipitated by a lack of demand for its beauty products, but by supply chain hiccups, labor disruptions and inflation, which drove it down. left short of cash and working capital.
“[B]Because many of the company’s competitors have more cash on hand, they have been able to build up more inventory ahead of time, invest in stocking components and raw materials, and pay upfront or a premium if needed. to secure additional supplies,” Revlon wrote. in its declaration of bankruptcy last week.
According to the filing, the company’s debt exceeded $3 billion. It has just $13 million in cash and has only generated $300 million in operating cash flow in the past 12 months.
Revlon held restructuring talks with groups of creditors, but the uncertain status of $500 million in loans made negotiations on a major debt tranche impossible. “The company has effectively had, since August 2020, no 2016 term loan counterparty with which it can negotiate,” according to the bankruptcy filing.
Holders of the $500 million in loans not returned to Citi included groups as large as Brigade Capital Management and HPS Investment Partners. Their recalcitrance stems in part from a controversy over an $880 million loan taken out by Revlon in May 2020 amid the early crisis of the pandemic.
As part of this transaction, the company transferred the intellectual property underlying Revlon labels such as Elizabeth Arden, Almay and American Crew to a new subsidiary called BrandCo, with the loan secured by these assets. The new loan caused an existing 2016 Revlon senior loan to drop in the repayment rankings, a move that infuriated some of the investors who held that loan.
A lawsuit filed in August 2020 by a subset of existing business lenders, who believed Revlon rigged BrandCo’s financing approval vote among existing lenders, called the maneuver a “sham.” Revlon has denied any wrongdoing.
This lawsuit was filed just a day after Citi mistakenly wired the $900 million refund. It was only intended to transfer $8 million in interest, but a data entry error led to the principal repayment error. If the U.S. Court of Appeals let the funds keep repayment, it would be a boon for these groups as they would keep 100 cents on the dollar while the open market loan trades at distressed levels.
Lawyers for the repaid lenders at Thursday’s bankruptcy court hearing described their clients as merely “contingent creditors” who, since they have already been repaid, will not need to participate in the fight against the bankruptcy unless the appeals court orders them to return the money to Citi.
Citi said if the repayment decision stands, it is ready to become a creditor of Revlon. “Following the [lower] court decision, Citi now has creditor rights related to the Revlon loan,” the bank recently wrote in a title filing.
Other creditors as well as Revlon shareholders are closely monitoring what happens to Citi’s claim because its ranking would influence the amount available for other stakeholders’ recoveries.
The bankruptcy court has already approved $575 million in financing provided by existing senior lenders who will fund the company through the deal. Revlon’s attorneys acknowledged in court that resolving both the Citi refund lawsuit and the suitability of the BrandCo 2020 financing transaction will be key issues in the bankruptcy.
“The tricky thing about Revlon going bankrupt is you have to figure out not just how to split the pie – which is the typical problem – but also how big the pie is and who actually owns the shares,” he said. Elisabeth de Fontenay, professor. of law at Duke University. “It will complicate things and possibly slow down the process.”
Bankruptcy funding does not require a restructuring plan to be filed until November, and the company said it hopes its operating performance will have rebounded by then.
A person involved in the case said Revlon’s value analysis, a traditional function of the bankruptcy process, will eventually become the central issue of the case once the capital structure is settled.
Even though Revlon loans and bonds are trading at distressed levels, the company’s market capitalization remains around $200 million. “It’s really set up to be a hardcore evaluation fight,” the person said.