revlon: Citi’s $900m Revlon ‘blunder’ could get more painful
The bank’s two-year mistake – in which it wired the balance of a $900 million loan rather than just the interest, then failed to collect most of it when investors claimed that Revlon was in default and should have repaid them anyway – will likely hamper the company’s restructuring plans, according to court documents. The problem: It’s unclear who, if anyone, is entitled to repayment of the remaining $500 million of the loan principal taken in an ongoing court battle over the accidental transfer.
After losing the first round of the fight last year with lenders who retained the wrongful payment, Citigroup said it had assumed rights as creditor of the troubled company. But Revlon has hinted — in a regulatory filing last month and bankruptcy court filings this week — that Citigroup’s claim to the money isn’t certain, leaving the door open for another showdown. head-spinning debt.
“There’s not a lot of law on this,” said Eric Talley, a Columbia University law professor who has studied the Citi-Revlon debacle. “Revlon would like nothing better than to completely wipe this debt off its books and have it be Citibank’s problem.”
The $900 million “clerical error” is believed to be one of the events that accelerated the timeline of former Citigroup CEO Michael Corbat’s retirement plans.
The so-called subrogation rights that Citigroup claims to have over the principal of the $500 million loan are a common concept in insurance law, but are relatively untested in the world of finance, according to Talley. The limited precedent that exists likely falls in favor of Citigroup, but Revlon’s precarious financial situation likely makes even a long-running attempt to erase debt worth considering, he said.
A Citigroup spokeswoman declined to comment, while a Revlon representative did not immediately comment when contacted by Bloomberg.
In its latest quarterly report, Revlon said it had not taken a position on Citigroup’s rights as a creditor. He went a step further this week, saying that if Citigroup ultimately loses its battle to recover the money, Revlon “reserves all rights and defenses to any claims Citibank may assert against” the company.
A successful challenge to Citigroup’s claim could wipe out nearly 15% of Revlon’s $3.4 billion debt in an instant, making it easier for the company to emerge from bankruptcy. But the scorched-earth tactic is far from a sure thing and risks damaging the company’s relationship with Citigroup, said Bloomberg Intelligence analyst Phil Brendel, who thinks the odds are stacked against Revlon.
“Remember Citi was a fantastic financial partner for Revlon in 2020 when it staged a new revolver just to gerrymand a lender vote to strip term lender assets from 2016,” Brendel said, referring to a controversial maneuver that has benefited a group of senior creditors now. key to corporate restructuring.
“Now, through a series of unfortunate mistakes and luck, Citi finds itself potentially the owner of these loans,” Brendel said. “Are Revlon and its likely new owners now adding insult to injury? I don’t think the answer is obvious.
Citigroup accidentally sent the $900 million to Revlon’s lenders in August 2020, an amount that paid off a term loan in full rather than making a much lower interest payment as expected. The bank quickly informed recipients of the error, but lenders including Brigade Capital Management, HPS Investment Partners and Symphony Asset Management refused to return the money, prompting legal action by Citigroup.
US District Judge Jesse Furman ruled in favor of the lenders last year, ruling they could keep the money. That left Citigroup $500 million in the hole – a mistake so big the bank had to restate its profits. Citigroup has appealed and is awaiting a decision.
(With help from Erin Hudson and Jenny Surane)