Bankrupt Revlon Trade (NYSE: REV) the stock has had a bumpy ride over the past few weeks and I expect their entire Ch.11 bankruptcy process to have an extremely bumpy ride due to the complexity of this case. Of course, Revlon’s actual future operating results are critical to stakeholders, but certain future court rulings could have a significant impact on investors holding Revlon’s debt and stock. This article is an update to my previous article on Revlon bankruptcy.
Official Equity Committee
As expected, some shareholders filed a request with the US Trustee for the appointment of a formal equity committee. (Seeking Alpha published this story on July 13.) I contacted the U.S. Administrator’s office but received no official response, but since no committee has yet been appointed, I assume it was refused at this point. The next step would be for those equity holders to file a petition in bankruptcy court asking Judge Jones to order the US trustee to appoint a formal equity committee. Since he is a brand new judge, he has no prior record on this issue.
Formal equity committees are covered by section 1102, but this section does not specifically state the requirements for appointment. These have been established by long case law. All of the following conditions must be met – not just most:
Revlon meets these requirements
*The case must be large and complex. *There is an active market for the stock. *Stock is widely held. *The request is timely.
Questionable if Revlon meets these requirements
*The company is not “hopelessly insolvent”. *Shareholders cannot be adequately represented without a formal equity committee.
Revlon is unlikely to meet these requirements
*Reasonable chance of significant recovery by shareholders. *Shareholder needs outweigh costs.
Just because a formal equity committee is appointed doesn’t mean there will be a takeover for Revlon shareholders. Breitburn Energy Partners had one and had fairly good legal representation, but shareholders still haven’t received anything. Horsehead Holding had one, but partly because the committee’s legal representation was absolutely horrible, in my opinion, shareholders got nothing.
Revlon stock price over the past three months
DIP funding motion
The next real fight in this bankruptcy case will be the hearing, which is currently set for July 28 and will most likely continue until the following day, for the approval of DIP’s request for funding (File 28). I expect this hearing to be very intense, as much of the case hinges on the issues associated with this motion.
The DIP Facility (Folder 44) is approximately $2 billion:
1) Super senior DIP facility, first lien and seed term up to $1.025 billion, including $575 million new money and $450 million refinancing for the pre-petition ABL facility. 2) ABL DIP super-priority facility, first lien and seed guarantee up to $400 million. 3) the amount of the Secured Junior Super-Priority Intercompany DIP Facility shall not exceed the amount of royalty payments due to the BrandCo Entities as licensors under the BrandCo License Agreements. (Implicit amount up to $575 million)
The fight is between the BrandCo DIP lenders and everyone else. In 2020, Revlon transferred much of its intellectual property, including brand names, to new entities (BrandCos). These new entities received royalties under licensing agreements. At first glance, it looks like a bunch of business-to-business payments, but these BrandCos entities issued secured debt. (I plan to cover the issues associated with these transactions in more detail in a future article.)
There are many items in the DIP motion that are being discussed and I am only covering a few of them. First, the official Unsecured Creditors’ Committee filed an objection (Folder 239) which included a proposal to extend by at least three months the DIP stage period required to file an RSA by November 1 and an “acceptable by November 30 (until at least February 1 and early March 2023). This would factor the results of the busy holiday shopping season and potential supply chain shrinkage issues into the creation of the Ch.11 reorganization plan. (The longer the better for REV shareholders, in my opinion.)
The requirement for a plan “acceptable” by BrandCo’s DIP lenders would effectively mean that BrandCo’s DIP lenders would be in the driver’s seat of creating the plan. Under Section 1121(b), Debtors (Revlon) have an exclusive 120 day time limit to file a plan and if filed within 120 days, it has an automatic 60 day extension. to request acceptance of the plan. Often, extensions are requested and granted to extend the 120-day period. The Committee is trying to review this “veto power” of the BrandCo DIP lenders.
The proposed DIP has no exception for paying post-petition vendors. The Committee wants an exception so that sellers are much more comfortable being paid. I think this exclusion is absolutely critical for Revlon because some vendors might still be reluctant to do business with Revlon even though they are considered 503(b)(1)(A) administrative expense claims that have the priority for payment. The problem is that if Revlon’s results worsen, they could become “administratively insolvent” and be unable to fully pay administrative expenses. Many vendors might be well aware of what happened to post-petition Sears Holdings (OTC:SHLDQ) vendors who agreed to a significant “haircut” and are still awaiting payment of their remaining reduced 503(b) claims.
Another disputed item is that if there is any litigation proceeds against BrandCo’s lenders that are claimed by various parties or the proceeds of any other litigation, the proceeds are part of the assets securing the DIP financing. What? So if BrandCo’s lenders eventually had to pay a judgment, that same money could go directly to BrandCo’s lenders. (It’s our legal system at its best – no). Of course, the Committee is against it.
Key employees get a retention bonus
After a hearing on July 22, Judge Jones approved (File 281) the Key Employee Retention Plan – KERP (File 116). This would pay approximately 160 “key” employees, who are not insiders, up to a total of $15.375 million. There have been some changes from the originally proposed KERP, such as the amount being reduced by $16.4 million, but the plan still involves an average payout of $96,000 per employee. This is an attempt to retain employees, but “if a KERP Participant is terminated for cause or resigns without cause prior to a plan’s confirmation date and June 30, 2023, all KERP payments received by such KERP Participant will be reimbursed” to Revlon.
Two groups of creditors
It is members of the two main groups who are currently involved in the bankruptcy process. Interestingly, some of these hedge funds own many different types of Revlon debt, including unsecured notes.
BrandCo lender ad hoc group (folder 43)
Ad Hoc Group of Term Lenders 2016 (folder 205)
Conclusion – Impact on Revlon shareholders
If the judge decides not to extend the milestone dates required for the filing of the RSA and plan of reorganization, Revlon shareholders are “toast”, in my view, as potential future positive developments will not be considered. in the plan. Given Revlon’s rather weak status, I wouldn’t expect any upside for shareholders then. Shareholders absolutely need this extension.
If there is no exclusion to pay suppliers post-petition, supply chain issues could persist as suppliers may remain reluctant to do business with Revlon, which would have a very negative impact on the results of the competition. future operations. This, of course, would then have a very negative impact on shareholders.
I don’t expect a formal equity committee as currently Revlon does not meet all of the requirements for a nomination. However, I expect an ad hoc equity committee, which is not an official committee and which does not charge its professional fees. Sometimes part or all of their fees are eventually paid as part of a confirmed reorganization plan. Oddly enough, the visual status of an official committee versus an unofficial committee is now changing because court hearings currently take place via zoom instead of official equity committee lawyers having a seat at the main table during the hearing with the lawyers of the official committee of unsecured creditors during the trial. hearings. Lawyers from the unofficial ad hoc equity committee sit on the benches with everyone else. With the zoom, they are all just on screens.
Revlon stock price has gone up since my last article, but I keep my neutral/hold note to see what might actually develop in this complex bankruptcy case.