A group of investors have accused the Revlon Inc. of stripping its collateral as part of a “brazen” scheme to raise new capital. The lawsuit, filed Wednesday by UMB Bank, a subsidiary of Kansas City, Missouri-based UMB Financial Corp., claimed Revlon wrongfully shifted the American Crew, Elizabeth Arden, Almay and other brands out of the hands of investors that had lent the company $1.8 billion in 2016.
The struggling cosmetics company improperly transferred the intellectual property rights used as collateral for the 2016 loan in a series of other transactions starting in 2019 as it lost market share and the pandemic hurt sales. UMB Bank is seeking a court order forcing the return of the collateral, which includes brand trademarks.
Accused of rigging lender vote
“This case is a stark example of a borrower that has ignored repeatedly its legal obligations to its lenders,” UMB said in the complaint filed Wednesday in federal court in Manhattan. “COVID-19 is no license to breach contractual commitments to lenders, to engage in transparent vote rigging, and to steal and reuse collateral for alternative purposes.”
UMB represents lenders including Brigade Capital Management, Symphony Asset Management, and HPS Investment Partners that have months resisting Revlon’s restructuring tactics.
According to the lawsuit, Revlon has been able to borrow rescue financing by taking away some of the brand assets securing the 2016 loan and pledging them as collateral to other lenders, including Ares Management.
In a statement, Revlon said the group had repeatedly resorted to “baseless accusations in an attempt to enrich themselves and hurt the company by blocking Revlon from exercising its contractual rights to secure the financing necessary to execute our turnaround strategy and navigate the Covid-19 crisis.”
Revlon said it would fight UMB’s “meritless” lawsuit.
Revlon, which is backed by Ron Perelman’s MacAndrews & Forbes, has struggled to make sales amid fierce competition from Estee Lauder Companies and a slew of smaller companies using social media to lure customers. To make matters worse, the beauty company is burdened with nearly $3 billion of debt as it battles the coronavirus epidemic.
According to the lawsuit, Revlon has been able to borrow financing only by taking away some of the brand assets securing the 2016 loan and pledging them as collateral to other lenders, including Area management. Furthermore, Revlon issued $65 million in revolving loans to rig a lender vote in favor of one of the restructuring efforts.
According to the lawsuit, Revlon siphoned off part of the collateral for the 2016 loan to secure a $200 million loan in 2019 from Ares Management, giving the new lender “its own, exclusive security interest in the same property.” The beauty company also negotiated a bigger, bolder transaction in May 2020 that raised another 870 million and was devastating for the 2016 lenders.
In addition, Revlon devised an end-run around the consent threshold by arranging a “sham” revolver loan with friendly investors who provided with the majority needed to improve new financing.
“Sham” revolving loans not uncommon
Several companies in recent years have siphoned off collateral assets away from lenders, taking advantage of flexible debt agreements to free up collateral and increase financial flexibility.
Earlier this year, booking platform Travelport Worldwide used assets pledged as collateral to secure a $1 billion loan package. It got into legal trouble with some of Wall Street’s biggest debt buyers.