- Revlon was supposed to file Chapter 11 this week
- Why's REV stock rising by 60% and 30%?
- Is it going to be Chapter 11 or not?
Revlon (NYSE: REV) stock was up 60% yesterday and another near 30% this morning premarket. For a company that's supposed to be going into Chapter 11 bankruptcy real soon now this is something of an odd pattern of stock price movements. It's worth trying to unpack this – almost, where is that Chapter 11 filing already?
Being realistic and not at all unkind about Revlon it's a collection of slightly tired brands and a large amount of debt. There's nothing wrong with any specific item in the portfolio but think about how brand life actually works. At first it's exclusive, that gains the brand premium. Then, exploitation of that premium means that it's less exclusive in order to gain more sales at that premium. This inevitably diminishes the premium over time. Most of Revlon's brands are on the downward slope of this process.
That plus a large pile of debt means the company is struggling. At which point the WSJ put out a story saying Revlon was going to file for Chapter 11. REV stock dropped 70%. The short interest is over 55%. This looks just like the normal sort of entry into that Chapter 11 status.
What needs explaining of course is why the rise this past 24 hours? Well, one idea is that meme stock status is available now – GameStop, Hertz, AMC all show that if enough investors decide to take a bet then anything can be achieved. That very large short interest also shows that a short squeeze would, or perhaps could, be worthwhile if only to shake out the last drops from the equity value. And that could be it, simply an attempt at a short squeeze. The equity is only of the $100 million sort of valuation at present and with 55% short, yes, could work, possibly.
There is one more thing here though. Revlon has been here before and it didn't go Chapter 11 on investors last time. Instead, that possibility of it doing so was used to haul large concessions out of the bondholders to prevent it being necessary. Doing that again would be worthy of Houdini but it is, just, possible that Ron Perelman will be able to do it again. Or perhaps more accurately, that he's going to try.
Revlon has some $3.3 billion in bond debt to pay, $2 billion coming due in the next couple of years. It's not going to be able to replay in full so it needs either to roll over or be able to cut the outstanding amount substantially.
The thing is we were here back in Nov 2020 too. The threat of Chapter 11 – and possibly much greater losses even for bondholders – led to a debt deal where creditors accepted 32.5 cents on the dollar.
At which point the calculation about the Revlon stock valuation becomes more complex. Yes, we can think that Chapter 11 will wipe out the stock. But the last time around, somehow, it was the bondholders who took the hit, not stockholders. So, what if that is true again this time around? If full recovery in Chapter 11 would be less than 100% for the bondholders then might they take a haircut without the Chapter 11?
That's the real question about the Revlon stock valuation. Will the bondholders take a haircut, as they did last time, or is Chapter 11 going to have to be used to force them to do so? If the first then Revlon stock has value, if the second then perhaps none.