As Revlon prepares to negotiate its reorganization after filing for bankruptcy last week, the American cosmetics giant still doesn’t know the identities of all of its major creditors, a result of a bizarre banking blunder.
In August 2020, Citigroup mistakenly used its own money to repay a $900 million term loan it was managing on Revlon’s behalf and held by multiple asset management groups. $400 million holders of the loan quickly returned the erroneous payment. Funds that owned $500 million of the loan, many of whom were angry at Revlon for a previous debt restructuring, kept the money.
In 2021, a federal judge in New York said those who stuck to the payback were legally entitled to do so. Citi appealed the decision. With the higher court yet to make a final decision, Revlon faces the possibility that the repaid lenders will be forced to return the proceeds and become Revlon’s creditors again.
However, Citi said in securities filings that if the original decision is upheld, it will assume the $500 million claim against Revlon, putting the Wall Street titan up against a loyal customer. Revlon said it was prepared for that potential fight, writing in court filings that it was “reserving.”[s] all rights and defenses with respect to any claim that Citibank may have against the Debtors.”
Revlon’s bankruptcy was already complex. In recent months, the company, long controlled by billionaire Ron Perelman, has been gripped by a liquidity crisis, leaving the court-supervised Chapter 11 lawsuit as the only way to stay afloat.
An attorney representing Revlon said Thursday at a first court hearing that it was “frustrating” that the aftermath of Citi’s blunder remained unresolved. It has pitted the company against credit and bondholders, leaving simmering tensions between various creditors.
According to the company, the bankruptcy filing was not prompted by a lack of demand for its beauty products, but by supply chain hiccups, work stoppages and inflation that had left it 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 more inventory up front, invest in stocking components and raw materials, and pay a premium up front or when needed to secure additional supplies,” Revlon wrote in its most recent bankruptcy statement Week.
According to the filing, the company’s debts exceeded $3 billion. It has just $13 million in cash and generated just $300 million in trailing-12-month cash flow from operations.
Revlon held restructuring talks with creditor groups, but the uncertain status of $500 million in loans made negotiations for a large debt tranche impossible. “As of August 2020, the company has had virtually no counterparty to negotiate with for 2016 Term Loans,” the bankruptcy filing reads.
Among the holders of the $500 million in loans not repaid to Citi were prominent groups such as Brigade Capital Management and HPS Investment Partners. Their recalcitrance stems in part from a controversy over an $880 million loan Revlon took out in May 2020 amid the early pandemic crisis.
As part of this transaction, the company transferred the intellectual property underlying such Revlon brands as Elizabeth Arden, Almay and American Crew to a new subsidiary called BrandCo, with the loan secured by those assets. The new loan pushed an existing 2016 Revlon senior loan down the repayment ranking, a move that enraged some of the investors holding the loan.
An August 2020 lawsuit filed by a subset of the company’s existing lenders who believed Revlon rigged the vote to approve BrandCo financing among existing lenders, called the maneuver a “sham.” Revlon has denied wrongdoing.
This lawsuit was filed just one day after Citi accidentally paid $900 million in repayment. It was only intended to transfer $8 million in interest, but a data entry error resulted in a principal repayment failure. Should the US appeals court allow the funds to keep the repayment, it will be a godsend for these groups as they will keep 100 cents on the dollar while the loan trades at distressed levels in the open market.
Attorneys for the repaid lenders in Thursday’s bankruptcy court hearing described their clients as only “conditional creditors” who, because they have already been repaid, need not participate in the bankruptcy fight unless the appeals court orders them to hand over the money to Citi repay.
Citi has said it stands ready to become a Revlon creditor if the repayment decision stands. “As a result of [lower] Court decision, Citi now has rights as a creditor in connection with the Revlon loan,” the bank wrote in a recent securities filing.
Other creditors, as well as Revlon shareholders, are closely watching what happens to the Citi claim as its ranking would affect the amount available for recovery from other stakeholders.
The bankruptcy court has already approved $575 million in funding from existing senior lenders that will fund the company through the case. Revlon’s attorneys acknowledged in court that the resolution of both the Citi repayment lawsuit and the adequacy of BrandCo’s 2020 financing transaction will be key issues in the bankruptcy.
“The difficult thing about the Revlon bankruptcy is that you not only have to figure out how to divide the pie – which is the typical problem – but also how big the pie is and who actually owns the pieces,” said Elisabeth de Fontenay , a law professor at Duke University. “That will complicate things and potentially slow down the process.”
The bankruptcy financing does not require the filing of a restructuring plan until November, and the company hopes its operating performance will have recovered by then.
A person involved in the case said analyzing how much Revlon might be worth, a traditional function of the bankruptcy process, would eventually become the central theme of the case after the wrangling over the capital structure was settled.
Even with Revlon loans and notes trading at distressed levels, the company’s stock market cap remains around $200 million. “This is really set up to be a hardcore ratings battle,” the person said.