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

Meme is very much a four-letter word for a group of minority shareholders in Revlon. The investors this week will ask a federal judge to give them a formal voice in the cosmetics company’s bankruptcy proceedings.

Revlon’s stock price had fallen to about $1 a share when the bankruptcy reorganisation kicked off two months ago but has since soared to more than $8, implying an overall market capitalisation of roughly $500mn.

Yet bond markets tell a different story. Revlon’s junior debt still trades at distressed levels and, with 83 per cent of its stock owned by Ron Perelman, the wacky surge in its price appears to reflect the meme-stock phenomenon that has swept up the likes of AMC Entertainment, GameStop and most recently Bed Bath & Beyond.

The divergent valuations will be the subject of an argument between the minority shareholders and debt holders at a hearing in a New York bankruptcy court on Wednesday.

In virtually all bankruptcies, shareholders are wiped in the subsequent reorganisation. But the Revlon minority group says Revlon could resemble Hertz, the car rental agency that went bankrupt early in the coronavirus pandemic only to reorganise with legacy shareholders getting a $1bn payout as the underlying business recovered almost miraculously. The Revlon minority group contends that this outcome is plausible enough that they should get their own official committee in the bankruptcy.

“The Debtors may argue that Revlon is akin to a ‘meme’ stock whose stock price is unmoored from its fundamental value,” the group wrote in a legal motion. “The Court should reject any such argument by the Debtors — who are duty bound to maximise value for all stakeholders, including equity — to short-circuit the stock price.”

The small number of Revlon shares available to trade have taken a wild ride in recent weeks, more than doubling since the start of August and rising nearly 600 per cent from the lows in mid-June. When momentum accelerated, so did discussions on social media forums populated by retail investors.

Mentions of Revlon have proliferated on the popular Reddit forum WallStreetBets, where contributors posted Revlon’s ticker symbol next to an emoji of a rocket on lift-off and another weighed in its “short squeezeablility”.

The share prices of meme stocks accelerate quickly, as a small price push will cause quant strategy investors and momentum traders to buy up shares, and short sellers to cover their positions.

The appeal to US bankruptcy court judge David Jones came after the Office of the US Trustee, the federal agency that oversees the bankruptcy process, in July denied the request for an official equity committee.

Lawyers for Revlon had since the outset of the case told the court that the process would be complex. The company still did not know who constituted its creditors after an infamous incident in 2020, when Citigroup accidentally repaid $900mn to Revlon lenders out of the bank’s own funds.

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

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

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

The shareholder agitation comes as the Revlon bankruptcy remains contentious among the debtholders who are, in accordance with bankruptcy law, to be repaid first before any proceeds for shareholders.

Revlon’s most senior creditors own a $2bn loan secured against much of the company’s intellectual property located in a Revlon subsidiary vehicle called BrandCo. The next highest-ranked loan, the subject of the Citi mishap, has a face value of $900mn.

Holders of $400mn of the loan returned their payments to Citi and now consider themselves Revlon creditors. Citi itself believes that it has so-called subrogation rights that allow the Wall Street bank to step into the shoes of the lenders who did not return the mistaken payment to Citi and become a creditor of Revlon. Citi recently sued in the bankruptcy court requesting that the judge confirm the subrogation rights.

Revlon’s most junior debt, $430mn of unsecured bonds, is trading at just 10 cents on the dollar, indicating that those bondholders are expecting to be impaired, leaving no value for Revlon shareholders.

In its filings advocating for an official committee, the minority shareholder group was wary of the dominant shareholder Perelman: “There is no assurance that Mr Perelman and his affiliates will act for the benefit of minority equity holders, rather than his own parochial interests.”

Most provocatively, the group’s lawyers maintained that the controversial $900mn loan may not even count as debt any more, arguing that Citi’s accidental repayment legally relieved all of Revlon’s responsibility and in turn left that value for current Revlon shareholders.

Over the weekend, Revlon said it opposed an official minority shareholder committee, arguing that it would waste the company’s cash in lawyers fees while other constituencies, such as Perelman or the unofficial committee of unsecured creditors, could advocate for minority shareholders.

Additionally, they pointed out that the minority shareholders had simply ignored that Revlon debt remained distressed, implying that its equity was worthless regardless of the stock market rally.

“The Ad Hoc Equity Committee makes no effort whatsoever to explain why this Court should disregard the market value of the Debtors’ debt securities — as the Motion does completely — when examining Revlon’s enterprise value, while crediting the Debtors’ stock price without question,” Revlon wrote in a court filing shared on Sunday.

Experts said the decision before the judge was a tough call.

“These cases with equity prices propped up by retail traders while the debt, which is mostly traded by allegedly more sophisticated activist hedge fund types, pose a significant challenge for bankruptcy judges,” said Jared Ellias, a professor at Harvard Law School. “Do you go with the retail investors when it seems possible their trading is based on being misinformed?”

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

“Rightly or wrongly, the market thinks there is value,” he said. “The court could say the market is bonkers, but rejecting markets evidence like that really opens up a can of worms.”