- Revlons stock is rising despite having filed for Chapter 11
- This is not what we normally expect to happen
- So, what is happening here at Revlon?
Revlon (NYSE: REV) stock is achieving the remarkable feat of actually rising in bankruptcy. This is not, really not, the way things are supposed to work in the financial world. But prices are information, so we do have to try and work out what this means here.
We had a look at Revlon stock a few days back and we were surprised that is was rising even given the stories about how it was about to go into Chapter 11. But that at least has the possibility that it won't file for bankruptcy, which would make the stock worth more. And yet now Revlon is in Chapter 11 (certain foreign subsidiaries are not, but the company itself is) which means that in theory we'd expect the equity to be worth nothing.
There's good reason for this too. The payment structure, order, goes secured creditors, unsecured and only when they're paid in full is there any possible value left for equity. Bond prices are such that it's most unlikely that all of the secured creditors will be paid in full and some of the unsecured are definitely going to be out of luck. By those traditional and standard measures there's no value left for the equity therefore. Simply because if there is then it gets transferred to the creditors in a debt for equity deal more likely than not.
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Which leaves us with this problem of, well, why the rise in the Revlon stock price even after entering Chapter 11? One possible answer is that it's a purely technical issue. Short interest is over 55%, that's not a difficult number to perform a short squeeze upon. This could therefore just be that, a few day's worth of pressure which will fade away.
Another thought is that Revlon's been here before and managed to negotiate out of it. Back a few years they did in fact, managing to talk bondholders into accepting a 65% and change haircut on their holdings. Maybe that could happen again? Which, well, yes, except that would all be a much more plausible story before Chapter 11 rather than after it.
So there's more than a certain mystery about why Revlon stock is rising after the Chapter 11 filing. It could be just a squeeze on the short interest. But there's also another possibility, which is that it's about to become another of these meme stocks. As happened to Hertz back in the day. There the stock price rose after Chapter 11 and then, absurdly, the company issued more stock at that higher price. This was guaranteed to lose money for whoever bought it – stock in a bankrupt company! And yet, as things turned out, those who did buy it made a profit. The real turnaround there was that the collapse in used car prices which tipped Hertz over into bankruptcy quickly reversed and thereby entirely changed the economics of the situation.
The bet therefore seems to be that something like this is going to happen to Revlon. Quite what it could be that changes the underlying economics like that here though, well, it's not obvious that there is anything.
The one thing we can be clear about is that REV stock is not reacting entirely rationally to the Chapter 11 filing. But why that is remains to be discovered.