Citi’s $900 million Revlon gaffe risks getting even more painful

It took less than a day for Citigroup’s now-infamous payment error to Revlon lenders to come up in the cosmetics giant’s bankruptcy.

The bank’s two-year-old blunder — in which it wired the balance of a $900 million loan rather than just the interest, and then failed to get most of it back when investors claimed Revlon was in default and should have repaid them anyway — will likely impede the company’s restructuring plans, court papers show. The problem: It’s not clear who, if anyone, has the rights to the repayment of the remaining $500 million of loan principal caught up in an ongoing court battle over the accidental transfer.

Revlon Inc. Products Ahead Of Earnings Figures
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After losing the first round of the fight last year with lenders who kept the erroneous payment, Citigroup
said it assumed rights as a creditor to 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 cash is not certain, leaving the door open for yet another head-spinning debt clash.

“There isn’t 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 wipe this debt off its books completely and have it be Citibank’s problem.”

The so-called subrogation rights that Citigroup claims it has over the $500 million loan principal are a common concept in insurance law, but are relatively untested in the world of finance, according to Talley. The limited precedent that exists probably falls in Citigroup’s favor, but Revlon’s precarious financial position likely makes even a long-shot attempt to wipe out the debt worth considering, he said.

A Citigroup spokeswoman declined to comment, while a representative for Revlon did not immediately comment when contacted by Bloomberg.

In its latest quarterly report, Revlon said it hasn’t taken a stance on Citigroup’s rights as creditor. It went a step further this week, saying that if Citigroup ultimately loses its battle to reclaim the money, Revlon “reserve all rights and defenses with respect to any claim Citibank may assert against” the company.

A successful challenge of Citigroup’s claim could erase almost 15% of Revlon’s $3.4 billion debt load in an instant, easing the company’s path out of bankruptcy. But the scorched-earth tactic is far from a sure thing, and risks souring the company’s relationship with Citigroup, said Bloomberg Intelligence analyst Phil Brendel, who believes the odds are against Revlon.

“Recall that Citi was a fantastic financing partner for Revlon in 2020 when it arranged a new revolver just to gerrymander a lender vote to strip assets from the 2016 term lenders,” Brendel said, referencing a controversial maneuver that benefited a group of senior creditors now key to the company’s restructuring.
“Now, through a series of unfortunate mistakes and luck, Citi finds itself potentially the owner of those loans,” Brendel said. “Do Revlon and its likely new owners now add insult to injury? I don’t think the answer is obvious.”

Citigroup accidentally sent the $900 million to Revlon lenders in August 2020, an amount that paid off the entirety of a term loan rather than fulfilling a much smaller interest payment as intended. The bank quickly notified recipients of the error, but lenders including Brigade Capital Management, HPS Investment Partners and Symphony Asset Management refused to return the cash, prompting a lawsuit from Citigroup.

U.S. District Judge Jesse Furman decided in favor of the lenders last year, ruling they could keep the money. That left Citigroup $500 million in the hole — a mistake so large the bank had to restate its earnings. Citigroup appealed and is awaiting a decision.

— With assistance from Erin Hudson and Jenny Surane.

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