As Revlon prepares to barter its restructuring after submitting for chapter final week, the American cosmetics group nonetheless doesn’t know the id of all its key collectors, a consequence of a weird banking mistake.
In August 2020, Citigroup mistakenly used its personal cash to repay a $900mn time period mortgage it administered on behalf of Revlon that was held by a number of asset administration teams. Holders of $400mn of the mortgage shortly returned the faulty fee. However, funds that owned $500mn of the mortgage, many livid with Revlon over a earlier debt restructuring, stored the money.
In 2021, a federal decide in New York mentioned those that held on to the reimbursement have been legally entitled to take action. Citi appealed in opposition to the choice. With the upper courtroom but to render a ultimate ruling, Revlon faces the chance that the repaid lenders will probably be compelled to provide again the proceeds and turn out to be Revlon collectors once more.
Citi mentioned in securities filings, nonetheless, that if the unique choice is upheld it should assume the $500mn declare in opposition to Revlon, pitting the Wall Street titan in opposition to a loyal consumer. Revlon mentioned it was ready for that potential struggle, writing in courtroom papers that it “reserve[s] all rights and defences with respect to any claim Citibank may assert against the debtors.”
The Revlon chapter was already advanced. In current months, a liquidity disaster has engulfed the corporate, lengthy managed by billionaire Ron Perelman, leaving the court-supervised Chapter 11 course of as its solely avenue to remain afloat.
A lawyer representing Revlon mentioned on Thursday at an preliminary courtroom listening to that it was “frustrating” that the fallout from the Citi error remained unresolved. It has pitted the corporate in opposition to mortgage and bondholders in addition to left simmering tensions amongst numerous collectors.
According to the corporate, the chapter submitting was not precipitated by an absence of demand for its magnificence merchandise, however by provide chain hiccups, labour disruptions and inflation, which had left it wanting money and dealing capital.
“[B]ecause many of the company’s competitors have more cash on hand, they have been able to build more inventory in advance, invest in stocking up on components and raw materials, and pay up front or a premium where needed to secure additional supplies,” Revlon wrote in its chapter declaration final week.
According to the submitting, the corporate’s debt exceeded $3bn. It has solely $13mn in money and generated simply $300mn in working money movement up to now 12 months.
Revlon held restructuring talks with creditor teams, however the unsure standing of $500mn of loans made negotiations over a significant tranche of debt unimaginable. “The company effectively has had, since August 2020, no 2016 Term Loans counterparty with which it can negotiate,” based on the chapter submitting.
Holders of the $500mn in loans not returned to Citi included such distinguished teams as Brigade Capital Management and HPS Investment Partners. Their recalcitrance stems partially from an argument over an $880mn mortgage taken out by Revlon in May 2020 amid the early pandemic crunch.
As part of that transaction, the corporate transferred the mental property underlying such Revlon labels as Elizabeth Arden, Almay and American Crew to a brand new subsidiary referred to as BrandCo, with the mortgage secured by these property. The new mortgage pushed an current 2016 Revlon senior mortgage down the reimbursement rankings, a transfer that infuriated a number of the buyers who held that mortgage.
An August 2020 lawsuit filed by a subset of current firm lenders, who believed that Revlon had rigged the BrandCo financing approval vote amongst current lenders, referred to as the manoeuvre a “sham”. Revlon has denied wrongdoing.
That lawsuit was filed only a day after Citi wired the $900mn reimbursement by mistake. It solely supposed to wire $8mn of curiosity however an information entry error result in the principal reimbursement miscue. Should the US appeals courtroom let the funds maintain the reimbursement, will probably be a windfall for these teams as a result of they may maintain 100 cents on the greenback whereas the mortgage on the open market trades at distressed ranges.
Lawyers for the repaid lenders within the chapter courtroom listening to on Thursday described their shoppers as solely “contingent creditors” who since they’ve already been repaid is not going to must take part within the chapter struggle except the appeals courtroom orders them to return the money to Citi.
Citi has mentioned that if the reimbursement ruling stands then it’s ready to turn out to be a Revlon creditor. “As a result of the [lower] court’s decision, Citi now has rights as a creditor related to the Revlon loan,” the financial institution not too long ago wrote in a securities submitting.
Other collectors in addition to Revlon shareholders are rigorously watching what occurs to the Citi declare as its rank would affect the quantity out there for recoveries of different stakeholders.
The chapter courtroom has already authorised $575mn in financing supplied by current senior lenders that may fund the corporate by the case. Revlon’s attorneys conceded in courtroom that resolving each the Citi reimbursement lawsuit together with the propriety of the 2020 BrandCo financing transaction will probably be key points within the chapter.
“What’s tricky with the Revlon bankruptcy is that you have to figure out not only how to split the pie — which is the typical issue — but also how big the pie is and who actually owns the slices,” mentioned Elisabeth de Fontenay, a professor of regulation at Duke University. “That will make things complicated and possibly slow down the process.”
The chapter financing doesn’t require a restructuring plan to be filed till November and the corporate mentioned that by then it hoped its working efficiency can have rebounded.
One individual concerned within the case mentioned analysing how a lot Revlon might be price, a conventional perform of the chapter course of, would ultimately turn out to be the central situation of the case after the capital construction wrangling was sorted out.
Even as Revlon loans and bonds are buying and selling at distressed ranges, the corporate’s fairness market capitalisation stays about $200mn. “This is really set up to be a hardcore valuation fight,” the individual mentioned.
