Revlon’s bankruptcy is complicated by Citi’s $900 million mistake

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As Revlon prepares to negotiate its restructuring after filing for bankruptcy last week, the US cosmetics group still does not know the identity of all its key creditors, following a freak banking error.

In August 2020, Citigroup mistakenly used its own money to pay off a $900 million term loan it managed on behalf of Revlon that was held by multiple asset management groups. Holders of the $400mn loan quickly repaid the erroneous payment. However, the funds holding $500 million of the loan, many furious with Revlon over an earlier debt restructuring, kept the cash.

In 2021, a federal judge in New York said that those withholding payment had a legal right to do so. Citi appealed the decision. With the high court yet to issue a final ruling, Revlon faces the possibility that the repaid lenders will be forced to repay the proceeds and become Revlon’s creditors again.

However, Citi said in securities filings that if the original decision is upheld, it will take on the $500 million claim against Revlon, pitting the Wall Street titan against a loyal client. Revlon said he was prepared for that potential fight, writing in court papers that he “reserves[s] all rights and defenses with respect to any claim that Citibank may assert against the debtors.”

Revlon’s bankruptcy was already complex. In recent months, a liquidity crisis has engulfed the company, long controlled by billionaire Ron Perelman, leaving the court-supervised Chapter 11 process as its only avenue to stay afloat.

An attorney representing Revlon said at an initial court hearing Thursday that it was “frustrating” that the fallout from Citi’s mistake remained unresolved. He has pitted the company against loan and bondholders, leaving simmering 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 problems, labor disruptions and inflation, which 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 to stock up on components and raw materials, and prepay or pay a premium when needed to secure additional supplies,” he wrote. Revlon. in his bankruptcy filing last week.

According to the presentation, the company’s debt exceeded 3,000 million dollars. It has just $13 million in cash and generated just $300 million in operating cash flow in the last 12 months.

Revlon held restructuring talks with creditor groups, but the uncertain status of $500 million in loans made negotiations on a significant tranche of debt impossible. “The company has effectively not had, since August 2020, any 2016 term loan counterparties with which it can negotiate,” according to the bankruptcy filing.

Holders of the $500 million in unpaid loans to Citi included such prominent groups as Brigade Capital Management and HPS Investment Partners. His stubbornness stems in part from a controversy over an $880 million loan taken out by Revlon in May 2020 amid the initial crisis of the pandemic.

As part of that 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 those assets. The new loan pushed an existing 2016 Revlon senior loan down in repayment classification, a move that angered some of the investors who held that loan.

An August 2020 lawsuit filed by a subset of existing business lenders, who believed Revlon had rigged BrandCo’s financing approval vote among existing lenders, called the move a “sham.” Revlon has denied any wrongdoing.

That lawsuit was filed just one day after Citi mistakenly transferred the $900 million refund. I only intended to transfer $8 million of interest, but a data entry error led to the principal payment error. If the US appeals court allows the funds to stay with the payment, it will be a windfall for those groups because they will be holding 100 cents on the dollar while the open market loan trades at difficult levels.

Attorneys for the repaid lenders at the bankruptcy court hearing Thursday described their clients as just “contingent creditors” who, since they have already been repaid, will not need to participate in the bankruptcy fight unless the court of appeals orders them to return the cash to Citi.

Citi has said that if the default is upheld, then it is poised to become a Revlon creditor. “As a result of the [lower] court decision, Citi now has rights as a creditor related to the Revlon loan,” the bank recently wrote in a securities filing.

Other creditors, as well as Revlon shareholders, are watching carefully what happens to Citi’s claim, as its range would influence the amount available for recoveries from other interested parties.

The bankruptcy court has already approved $575 million in financing provided by existing major lenders that will finance the company through the case. Revlon’s lawyers admitted in court that resolving both Citi’s demand for payment and ownership of the BrandCo 2020 financing transaction will be key issues in bankruptcy.

“The tricky thing about the Revlon bankruptcy is that you have to figure out not only how to divide the pie, which is the typical problem, but also how big the pie is and who owns the slices,” said Elisabeth de Fontenay, a professor . of law at Duke University. “That will complicate things and possibly slow down the process.”

Bankruptcy financing does not require a restructuring plan to be filed until November, and the company said it expected its operating performance to have recovered by then.

One person involved in the case said analyzing how much Revlon might be worth, a traditional function of the bankruptcy process, would eventually become the focus of the case after the dispute over capital structure was resolved.

Despite Revlon’s loans and bonds trading at distress levels, the company’s stock market capitalization is still around $200 million. “This really is set up to be a tough valuation fight,” the person said.

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