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Behind the Scenes of Revlon’s Debt

"At some point, whether it’s in court or out of court, it will have to be a debt restructuring."

There is a lot going on behind the scenes at Revlon — and it spans far beyond lipstick production.

The beauty business, which was taken over by Ron Perelman and his leverage-happy firm MacAndrews & Forbes in the Eighties, has a complicated financial structure — on top of sluggish sales. 

In September, the company set forth an exchange offer for certain notes after a previous attempt failed. If this one goes through, Revlon will buy some time to execute yet another turnaround attempt. But if it doesn’t, the company will be forced to refinance again, experts said. And while Perelman is known for finding the cash, especially for Revlon, this time things may not be quite so easy. 

Earlier this year, Revlon executed a move that some lenders, to put it simply, didn’t like. 

The business recapitalized in a way that stripped away access to intellectual property that had previously secured loans made in relation to Revlon’s Elizabeth Arden acquisition. Then, Citibank, Revlon’s administrative agent, said it accidentally transferred about $900 million to those lenders, and then sued several who declined to return the money. Lawsuits are ongoing.

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In response to one lawsuit brought against Revlon by UMB Bank NA, the beauty company called the group of lenders “desperate” and said they had “plenty of time and opportunities to attempt to legally block any of these financing transactions.” 

The debt markets are flush with capital but it could be tough for MacAndrews & Forbes to get access to that, according to Reshmi Basu, restructuring editor at Debtwire. “Given the bad publicity they have in the leveraged loan markets right now from stripping away asset value from lenders…it would actually be very tough for them to do a deal,” Basu said. “It’s been a huge issuance month, but consumer products, retail, anything that has exposure to the consumer, investors have less risk appetite for that.

“Investors are very hesitant to invest in a MacAndrews & Forbes company,” she said.

Revlon and MacAndrews & Forbes declined to comment for this story.

With a debt to earnings before interest, taxes, depreciation and amortization ratio of more than 23 times, according to S&P Capital IQ, Revlon is perceived as risky. “It’s complicated, it’s volatile, it’s over-levered,” Basu said. 

Judah Gross, director of leveraged finance at Fitch Group, noted that when leverage approaches eight or 10 times, that is considered high.

“[Perelman’s] daughter is the ceo. When I think about it that way, I’m like, no, he’s going to fight for this. But at some point, whether it’s in court or out of court, it will have to be a debt restructuring, it’s too over levered. And the earnings trends aren’t necessarily going in the right direction,” Basu said. 

For the most recent quarter, Revlon reported a net sales decline of 39 percent. Fragrance was the hardest hit segment, followed by the Revlon brand, which saw sales shrink 45 percent to $135 million for the quarter.

These particular drops were attributed to the impacts of the coronavirus pandemic, which has impacted the beauty industry broadly. But by the time COVID-19 hit, Revlon had already been struggling for years. While the business has several products that were early to market trend-wise — like EWG-verified PhotoReady Prime Plus Perfecting Smoothing Primer and Almay’s Biodegradable Face Wipes — newer, fresher brands like E.l.f. and Morphe have started to encroach on mass market mainstays.

Revlon has also operated with a revolving door of chief executive officers that most recently ushered in Perelman’s daughter Debbie, who was hired to run the business in 2018. Before her there was Fabian Garcia, now at Unilever, who reorganized the entire business after the Arden acquisition with plans to reach $5 billion in sales by 2022.

Revlon has not yet come close to meeting that goal. Industry sources say many of Revlon’s brands have lost shelf space and relevance, and a plan to sell off assets has so far been unsuccessful.

In 2019, Revlon hired Goldman Sachs to sell all or part of the company. A few months into the process, the goal became to sell some of Revlon’s smaller brands to allow it to focus on the bigger picture. Still, there have been no takers.

Multiple industry sources said that earlier this year the company went out to more niche investment bankers asking them to try their hand at selling some of the smaller brands, like Almay, which is said to have seen sales plummet this year.

Industry sources believe that Almay, American Crew, Mitchum and Elizabeth Arden still have value, and could potentially attract buyers, but that Revlon’s fragrance portfolio and the namesake brand may not be able to generate much interest.

If something did sell, it would join the growing list of Perelman-owned assets that no longer appear to spark joy. The billionaire has said publicly he’s longing for the simple life, and seems to be selling off everything from fine art to boats to MacAndrews & Forbes companies in pursuit.

“It definitely seems like they’re raising money,” Basu said. “That’s kind of the mystery in the market. The question is, how much support are they going to throw to their portfolio companies? Everyone is definitely trying to figure that out in the leveraged loan market.”

Historically, Perelman has been painted as a corporate raider, a term used to highlight his ability to make money for himself instead of for the companies he owns.

“For any standard private equity company, if they lever up their portfolio company, meaning they have that portfolio company take on more debt, they can theoretically use that debt to pay themselves dividends and cash out their position,” Gross said.

That type of move is common enough in private equity, but having too much leverage without enough money coming in can put a business in a tough position, Gross said.

Some companies remain highly leveraged for years without defaulting on loans, others “work their way up to investment grade and execute on a financial strategy in line with that,” and others go bankrupt, Gross said. “How Revlon will turn out, sitting where I am right now, it’s anyone’s guess.” 

For more from, see: 

Revlon Names Debbie Perelman President and CEO

Revlon Restructuring Plan Includes Significant Layoffs

Revlon Launches Another Exchange Offer