Revlon’s furious stock market rally complicates cosmetics maker’s bankruptcy


Meme is really a four-letter word for a group of minority Revlon shareholders. Investors will ask a federal judge this week to give them an official voice in the cosmetics company’s bankruptcy proceedings.

Revlon’s stock price had fallen to around $1 a share when the bankruptcy reorganization began two months ago, but has since climbed to over $8, implying an overall market capitalization of around $500. millions of dollars.

Yet bond markets tell a different story. Revlon’s junior debt is still trading at distressed levels and, with 83% of its shares held by Ron Perelman, its outlandish price surge appears to mirror the meme stock phenomenon that has swept through AMC Entertainment, GameStop and more recently. Bed bath and beyond.

The diverging valuations will be the subject of a dispute between minority shareholders and creditors during a hearing in a New York bankruptcy court on Wednesday.

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In virtually all bankruptcies, shareholders are wiped out in the ensuing reorganization. But minority group Revlon says Revlon could look like Hertz, the car rental company that went bankrupt at the start of the coronavirus pandemic to reorganize with legacy shareholders receiving a $1 billion payout as the underlying business was recovering almost miraculously. Minority group Revlon argues that this outcome is plausible enough that they have their own formal committee in the bankruptcy.

“Debtors may argue that Revlon is a stock-like ‘meme’ whose stock price is unrelated to its fundamental value,” the group wrote in a lawsuit. “The Court should reject any such argument by obligors – who have a duty to maximize value for all stakeholders, including equity – to short the stock price.”

The small number of Revlon shares available for trading has taken a wild turn in recent weeks, having more than doubled since the start of August and rising nearly 600% from the mid-June low. As momentum picked up, so did discussions on social media forums populated by retail investors.

Mentions of Revlon proliferated on the popular Reddit forum WallStreetBets, where contributors posted the Revlon symbol alongside an emoji of a rocket taking off and another weighed in its “short squeezeablility”.

Meme stock prices are accelerating rapidly, as a small push in price will cause quantitative investors and momentum traders to buy stocks, and short sellers to cover their positions.

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The appeal to U.S. Bankruptcy Court Judge David Jones came after the U.S. Office of the Trustee, the federal agency that oversees the bankruptcy process, in July rejected a request for a formal bankruptcy committee. equity.

Revlon’s attorneys had from the start of the case told the court that the process would be complex. The company still didn’t know who made up its creditors after an infamous incident in 2020 when Citigroup accidentally repaid $900 million to Revlon’s lenders from the bank’s own funds.

One of the minority shareholders, Christopher Mittleman of Mittleman Brothers Investment Management, recently wrote that Revlon shares could be worth a reasonable $10 each if the company is acquired by a rival who could extract synergies.

“The expectation of a positive recovery from existing equity in bankruptcies is usually the domain of delusional speculators, but I view Revlon as a liquidity-focused company. [Chapter 11]not a truly insolvent entity,” he wrote.

Two other shareholders lobbying for the official committee, Kevin Barnes and Adam Gui, are struggling investors who worked together as shareholders in the recent bankruptcies of Latam Airlines and retailer Tuesday Morning.

The shareholder unrest comes as Revlon’s bankruptcy remains controversial among creditors who, under bankruptcy law, must be paid before any shareholder proceeds.

Revlon’s major creditors hold a $2 billion loan secured by much of the company’s intellectual property located in a Revlon subsidiary called BrandCo. The second-highest-ranked loan, subject to the Citi crash, has a face value of $900 million.

The $400 million loan holders have repaid their payments to Citi and now consider themselves creditors of Revlon. Citi itself believes it has so-called “subrogation” rights that allow the Wall Street bank to step into the shoes of lenders who failed to return the erroneous payment to Citigroup and become Revlon’s creditor. Citi recently filed a lawsuit in bankruptcy court asking the judge to uphold the subrogation rights.

Revlon’s most junior debt, $430 million in unsecured bonds, trades at just 10 cents on the dollar, indicating that these bondholders expect to be written down, leaving no value for stockholders. Revlon.

In its papers arguing for a formal committee, the group of minority shareholders was wary of dominant shareholder Perelman: “There is no guarantee that Mr. Perelman and his affiliates will act for the benefit of minority shareholders, rather than his own parochial interests.

More provocatively, the group’s attorneys argued that the controversial $900 million loan could not even be considered a debt anymore, arguing that Citigroup’s accidental repayment legally relieved all liability from Revlon and in turn left that value to current Revlon shareholders.

Over the weekend, Revlon said it opposed a formal committee of minority shareholders, arguing it would waste the company’s money on attorney fees while other constituencies, like Perelman or unofficial committee of unsecured creditors, could defend minority shareholders.

Moreover, they pointed out that minority shareholders had simply ignored that Revlon’s debt remained in trouble, implying that its equity was worthless regardless of the stock market rally.

“The Ad Hoc Equity Committee makes no effort to explain why the Court should ignore the market value of debtors’ debt securities – as the motion does completely – when considering Revlon’s enterprise value. , while crediting the debtors’ stock price with no questions asked,” Revlon wrote in a shared court filing on Sunday.

Experts said the decision in front of the judge was a difficult one.

“These cases with equity prices backed by retail traders while debt, which is primarily traded by supposedly more sophisticated types of activist hedge funds, pose a significant challenge for bankruptcy judges,” said Jared Ellias, professor at Harvard Law School. “Do you support retail investors when it seems possible that their trading is based on bad information?”

Anthony Casey, a law professor at the University of Chicago, believes that market forces cannot be easily ignored.

“Rightly or wrongly, the market thinks there is value,” he said. “The court could say the market is crazy, but to reject such market evidence really opens a Pandora’s box.”


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