Revlon: Chapter 11 marks end of easy money era for US financiers

Wall Street can only apply so much cover-up and blush to a broken capital structure. US cosmetics maker Revlon, long backed by financier Ron Perelman, has filed for bankruptcy protection.

The tumble, as the Federal Reserve raised interest rates 0.75 per cent, marks the switch from an easy money era to a time of slender means. Ongoing inflation and supply chain blockages forced Revlon to succumb to liquidity and leverage problems common to financially over-engineered businesses.

The company generated $58mn of ebitda in the first quarter, its highest profitability in years. Still, Revlon has total debt of more than $3bn. It must reduce its enterprise value by slashing leverage, likely wiping out public shareholders. Perelman owns about 80 per cent.

The company has not kept up with beauty trends. Upstart brands have won over younger generations. Revlon’s reckoning was delayed by acquiescent capital markets. These have allowed the company to raise more cash, exchange existing paper and extend maturities.

Numerous US companies have followed the same path. Some used that breathing room to grow and prosper. Many will now continue in Revlon’s footsteps, asking a bankruptcy court judge to oversee a messy fight between creditors.

Revlon is best known at present for a bizarre banking snafu. Citigroup, which oversaw a large term loan for the company, accidentally repaid $900mn of principal balance in 2020 when it meant to just make an interest payment. Whether the repayment is to be unwound remains a matter for the courts.

A preceding episode matters more as an emblem of the financialisation of US business. Revlon, desperate for cash, had issued a new $1.8bn loan. Buyers of that loan received as collateral Revlon intellectual property that had already been pledged to senior creditors.

Such collateral-stripping has become commonplace in recent years, with varying legal success. Such deals gave companies like Revlon a long shot chance of a turnround. However, with a contentious bankruptcy ahead, the cosmetic group and its peers would have been better off taking a hard look in the mirror years ago.

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