September 6th 2020
Currently tracking 216 credits from 123 companies.
If you wish to view the Distressed Watchlist within Google Sheets, please request access to it and I will shortly grant you access to it.
Leaders for the Week
Laggards for the Week
After Gogo Inc (GOGO) confirmed it plans to sell its CA unit to Intelsat, its' capital structure continued to trade higher this week. GOGO 9.875 '24 traded up 2.5pts to 107.00. The stock doubled closing at 10.07, making the converts trade up 66 points this week to 166. GOOG bonds have been now been removed from the Distressed Watchlist.
As more movie theaters begin to reopen, AMC Entertainment (AMC) bonds and stock moved higher this week. The AMC 10.50 '25 first lien notes traded up 8pts to 92.00 yielding 12.9% while the AMC 12.00 '26 second lien notes traded up 7pts to 42.00. The stock ended higher by 11.4% this week.
Briggs & Stratton (BGG 6.875 '20) fell 6pts to 1.00 as no futher qualified bids for the company were submitted by the Aug 28th deadline. It was rumored that Generac Power Systems (GNRC) was compliating making a bid but did not. Only a UCC challenge stands in the way of KPS Capital Partners finalizing its purchase of the business.
Transocean (RIG) will continue to focus on their $2B debt swap after a judge ruled against Whitebox's "fradulent and coercive" claims. RIG 7.50 '31 traded down 2pts to 18.00.
Hertz (HTZ) unsecured notes traded higher by 4pts to 45.00, their highest level since filing for bankruptcy earlier this summer.
Ahern Rentals (AHERN 7.375 '23) traded higher by 10pts to 52.00 yielding 37.0%.
Whiting Petroleum (WLL) emerged from bankruptcy this past week. The company emerged with a new credit facility and converted nearly all of its other debt into stock.
Revlon's Chaos and Controversy
It was 35 years ago when Ronald Perelman completed a hostile takeover of Revlon with the aid of junk bonds and corporate lawyers. Since then Revlon has been no stranger to chaos or controversy. The company continues to struggle with high amounts of debt as they try to navigate through these challenging times. As a result, Revlon implemented a restructuring and recapitalization plan to reduce costs and extend its financial runway set back in March.
Revlon develops, manufactures, markets, distributes, and sells worldwide an array of beauty and personal care products. The company has four brand-centric business segments:
Revlon is comprised of the Company's flagship Revlon brands. Sold within stores in the U.S. and internationally under brands such as Revlon in color cosmetics; Revlon ColorSilk and Revlon Professional in hair color; and Revlon in beauty tools. (39.6% of total sales)
Elizabeth Arden is comprised of the Company's Elizabeth Arden branded products. The segment markets, distributes and sells fragrances, skin care and color cosmetics such as Elizabeth Arden Ceramide, Prevage, Eight Hour and Elizabeth Arden 5th Avenue. (21.5% of total sales)
Portfolio markets, distributes and sells a comprehensive line of premium, specialty and mass products. Brands include Almay, SinfulColors, American Crew, CND, Cutex, Mitchum, Creme of Nature and Llongueras. (20.2% of total sales)
Fragrances includes the development, marketing and distribution of certain owned and licensed fragrances, as well as the distribution of prestige fragrance brands owned by third parties. Owned and licensed brands include Juicy Couture, John Varvatos, AllSaints, Britnet Spears, Elizabeth Taylor, Curve and other celebtrity-branded fragrances. (18.7% of total sales)
Hostile takeover by Ronald Perelman
Revlon was founded back in 1932 with the focus on beauty care products – nail polish. Over next 50+ years, the company branched out to a wider range of beauty care products as well as diversifying into other businesses outside its core business.
In the year 1985, Ronald Perelman made a series of offers to buy all outstanding shares of the company but faced resistant from Revlon's board of directors as they supported selling to a lower competing bid.
Back by junk bonds to aid his superior bid, Ron Perelman (thru his wholly owned business – MacAndrews & Forbes' subsidiary Pantry Pride) won a huge legal battle against Revlon, which ultimately set a legal precedent to what is known as the "Revlon Rule".
The "Revlon rule" is the legal principle stating that a company’s board of directors shall make a reasonable effort to obtain the highest value for a company, when a hostile takeover is imminent.
After the court ruling, Revlon's board of directors stepped aside while MacAndrews & Forbes purchased the remaining shares of Revlon' stock. MacAndrews & Forbes went on to sell various business units of Revlon's to help repay some of the financing used in the takeover, leaving the core Revlon beauty product division.
After rebuilding Revlon for nearly the next decade, the company returned back to the public markets in 1996 under the ticker REV, where Ronald Perelman's MacAndrews & Forbes owned and controlled a majority stake.
Acquisition of Elizabeth Arden
In 2016, Revlon purchased Elizabeth Arden for approximately $870 million. Revlon believed the purchase would help the company benefit from an expanded global footprint and diversify their presence across all major beauty categories.
Like in the past, Elizabeth Arden acquisition was helped funded with a debt – a new $1.8B senior secured term loan facility (2016 Term Loan) and $400M senior secured asset-based revolving credit facility.
In hindsight, the acquisition did not work out as well Revlon hoped. Only one year after the closing the deal, Revlon saw its LTM revenues dropped every quarter since Sept 2017.
Total debt increased steady over that time frame as well its' interest expense.
In 2018, Ron Perelman's daughter took over as CEO of Revlon. The company seemed to be making some progress in turning around the business until the Covid pandemic came along.
Term Loan restructuring
Back in March, the company announced a "Transformative 2020 Business Optimization Program and Refinancing Agreement" to improve its' cost structure and capital structure. This agreement allowed the company to extend the majority of its "2016 Term Loan" which was due to 2023 out to 2025.
Acting on the behalf of remaining "2016 Term Loan" lenders, UMB Bank sued Revlon last month over the recent loan transaction. The suit claims that nearly $2 billion of collateral was transferred away from the "2016 Term Loan" to the new "2020 BrandCo Term Loan".
This transfer of collateral combined with the overall weakness in Revlon's businesses caused significant losses in 2020 for the "2016 Term Loan" lenders.
The price of loan began the year in the mid 70s and fell below 30 since the completion of the new "2020 BrandCo Term Loan".
Citi's incompetence adds to lenders frustrations
To make matters even worse, Citigroup accidentally sent full paid of Revlon's 2016 Term Loan instead of its interest payment. Already upset with Revlon stripping away collateral, some lenders refused to return the mistaken payment.
2021 Senior Notes – Buyback + Exchange
After the completion of the new term loan, Revlon utilized its additional cash to purchase approximately $113M of its 5.75% Senior Notes due 02/2021 for $51M. It reduced the total amount outstanding from $500M to ~$387M. After the transactions, Revlon stated as of July 17 it had ~$396M of total liquidity available.
On July 27th, the company commenced an offer to exchange its 5.75% Senior Notes due 2021. The exchange offer are subject to two major things
- valid tender without valid withdrawal of not less than 95% of the aggregate outstanding principal amount of Existing Notes
- consents from the lenders under the Company’s term and revolving credit agreements
The original Exchange Offer was to expire at 11:59 p.m. on August 21, 2020 but only ~20M bonds consented, so it was then extended to Sept 11, 2020.
For each $1,000.00 principal amount of Existing Notes tendered into the Exchange Offer and Consent Solicitation holders of Existing Notes will receive $750.00 principal amount of New Notes and $50.00 of cash if submitted by the early tender date of Aug 7.
Revlon vs Bondholders in a "game of chicken"
Typically, when a company tries to complete a distressed exchange, especially one with a reduction of face, the company will offer something else in value. Whether it would be exchanging into a higher ranking debt instrument, cash compensation, and/or offering common stock, a bondholder is expected to be compensated for the exchange as well as taking the haircut.
Revlon's initial exchange offer can be perceived as quite aggressive since it really offers nothing to bondholders outside of avoiding bankruptcy. It is no surprise that the first deadline results were a mere $20M (~5% of outstanding bonds) bonds were tendered to exchange.
Yet, the 2021 bondholders are in a tough situation. Forcing the company into bankruptcy when a higher ranking senior secured "2019 term loan" is trading at less than 30 cents on the dollar might result in little to no recovery value. Something that lenders would gladly welcome.
All bondholders can do at this moment is continue to hold out and hope to receive a better exchange offer. But if history serves as a lesson, Revlon and Perelman have been ruthless in the past.
Back in 2009, Revlon was said to "pulled a fast one" on shareholders by exchanging common stock for preferred stock weeks before announcing better than expected financial results. The move aided MacAndrews & Forbes from controlling an even greater share of the business.
Can bondholders really expect much better terms when Revlon/Perelman knows well about bonds lack of better alternatives?
It will be interesting to see the tender results come this Friday. Yet, even if this tender offer was to get the necessary amount, the "2016 Term Loan" lenders have already expressed they will not give their consent to this exchange, causing additional drama.
Revlon (REV) Stock
The market capitalization stands at $413M as of Friday. It might seem high considering where the majority of Revlon's debt is trading but Ron Perelman's MacAndrews & Forbes owns ~87% of Revlon's common stock, thus making the stock very thinly traded.
Over the past decade, Revlon has not increased its shareholder value only and issued more debt.
This current Revlon situation is one of the most unique situation I have seen in quite some time. Putting the lender lawsuit aside, the real battle to watch over the next few months will be between the company and the 2021 senior notes.
What would the senior note bondholders rather prefer – take their chances in bankruptcy or exchange their notes for more runway?
Will Ronald Perelman decide to provide fresh capital to keep his ownership stake untouched?
Or will the company offer bondholders some equity to extend their notes?
Some many think Ronald Perelman has own Revlon for over 30 years and have an emotional attachment to his investment. They will also add that having his daughter as CEO favors the reasoning.
Yet, there has been reports questioning his financial stability of this billionaire as of late. Recently, it was reported Mr. Perelman sold his 70% stake in AM General (maker of Humvee) to private equity firm KPS Capital Partners at what insiders reported "at a fire-sale price" (~$1B). Ron Perelman also stated he is exploring a sale of his 39% stake (worth ~$700M) in Scientific Games (SGMS).
In a rare, unusually personal statement to Vanity Fair, Perelman wrote in an email, “I have spent my entire career making deals and have been through tough cycles before, and while this is certainly a challenging time, it is just that. This period has given me the space to think carefully about myself and my business, and to reset my priorities.
So it begs to question. Is Revlon still one of Ron's priorities?