Revlon’s sizeable and potentially vulnerable capital structure, along with its lackluster earnings, have put the iconic cosmetics maker on the top of distressed investor and advisor watchlists. In recent days, advisory firms including Houlihan Lokey have reached out to Revlon bondholders in an effort to organize a group, according to three sources familiar with the matter.
The effort comes as investors have become increasingly nervous that the cosmetics giant could employ aggressive asset transfers to preserve equity for Ron Perelman’s private equity firm, MacAndrews & Forbes. A group of Revlon lenders have already begun proactively consulting with law firm Arnold & Porter Kaye Scholer for assistance in reviewing the borrower’s loan documents for clues as to how the sponsor could strip away value from lenders.
A key issue for investors is whether Revlon will carve out intellectual property, brand value or international assets to an unrestricted subsidiary. As such, some individual funds – who themselves have separately engaged legal counsel – have been examining the borrower’s credit agreements and bond indentures to determine how the company can exploit its balance sheet.
Besides the credit agreement, investors have also honed in on the indenture backing Revlon’s USD 500m 5.75% senior unsecured note due 2021, since it appears to be the most restrictive when it comes to investment capacity, said two of the sources.
Still, some holders note that Revlon has the wherewithal to refinance the 2021 bonds, given the company’s roughly USD 450m in incremental secured capacity, the same sources noted. But before participating in such a deal, investors would likely want to see a several quarters of earnings stabilization, sources said.
In contrast, recent quarters have proved disappointing, with the company’s mass beauty channel in the US dragging results lower. Lackluster earnings combined with the potential for a J.Crew-type asset transfer has also been weighing on the issuer’s capital structure over the last several months.
For 3Q17 ended 30 September, the borrower recorded USD 666.5m in net sales, up from USD 605m in the prior-year period, according to SEC documents. Organic revenue slipped by 10.5%, with the consumer segment down 10.9%.
Weakening sales in North America played spoiler, with a 22.8% 3Q17 decline, while sales for international markets increased 4.9% in 3Q. Adjusted EBITDA sunk by 52.5% in 3Q to USD 53.6m, compared to USD 112.9m last year, bringing leverage to 10x.
At 30 September, Revlon had USD 204.6m of liquidity, consisting of USD 79m in cash and USD 125.6m of revolver availability.
Revlon’s USD 1.791bn Libor+ 325bps (75bps floor) term loan due 2023 was last quoted at 75.813/77.313, compared to the 86/87 context at October-end, according to Markit. Its USD 500m 5.75% senior unsecured notes due 2021 last traded at 79 to yield 14.184% on 8 December, compared to 85.875 on 1 November.
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Messages left with the company and with Houlihan were not returned.
by Reshmi Basu