Four Lawsuits, 17 Companies, and $ 900 Million: The Story Behind Citi’s “Flawed” Loan Repayment

The story of Citibank’s mistaken loan repayment of $ 900 million begins with shaving cream.

More specifically, the intellectual property behind shaving cream is owned by a Revlon subsidiary, along with many other Revlon products.

In 2016, the personal care brand Revlon acquired Elizabeth Arden, a make-up label friends and the former seller of the Britney Spears fragrance line.

Revlon paid cash for Elizabeth Arden, a total of $ 870 million. Upon completion of the transaction in September 2016, Revlon took out two loans: a senior secured term credit facility of $ 1.8 billion and a senior secured revolving credit facility of $ 400 million.

The purchase came at a crucial time in the beauty industry. Direct-to-consumer startup Glossier was on the rise, and its dewy, millennial pink branding and influential marketing transformed the beauty business, leaving Revlon behind.

“Revlon’s traditional trust in established fashion icons as ambassadors for its brands has not sparked the same enthusiasm as fashion newbies and self-made experts who are familiar with social media platforms,” ​​says a lawsuit filed by UMB Bank against Revlon and Citizenship 12. August.

About four years later, a dispute over the loans Revlon used to fund the acquisition has escalated into four lawsuits involving at least sixteen companies and $ 900 million.

To understand the credit debacle, one must first understand its root: the acquisition itself.

Revlon acquired Elizabeth Arden, which was publicly traded at the time, for $ 14 per share in cash, a 50 percent markup on the company’s closing price on June 16 when the deal was announced. The deal included a provision for the repayment of Elizabeth Arden’s debts and preferred stock.

BofA Securities and Citi agreed to fund a total of $ 2.6 billion for the transaction, which would be used to refinance Elizabeth Arden and Revlon’s debts. A lawyer estimates that the transaction’s lenders included Brigade Capital Management, Highland Capital Management and Symphony Asset Management, among others.

The loans were backed by intellectual property as collateral, including brands of beauty brands. The value of this collateral was “enormous in relation to the value of the entire Revlon company,” according to UMB’s lawsuit.

“The lenders … have made their investments dependent on the quality and access to this collateral,” says the lawsuit.

The problems started in August 2019 when Revlon executed a plan to raise a second loan of $ 200 million. Private equity firm Ares Management provided the money, and in return Revlon provided collateral: the intellectual property of American Crew, a men’s shaving and personal care brand ubiquitous in drugstores.

However, that intellectual property had already been pledged as collateral on one of the loans Revlon took out in 2016 to fund the Elizabeth Arden acquisition, according to a lawsuit filed this month by UMB Bank.

According to the UMB lawsuit, Revlon was “just getting started”. In the spring of 2020, Revlon closed a deal that, according to the UMB lawsuit, transferred the intellectual property rights of many more of its trademarks to its subsidiaries, including the rights to Elizabeth Arden, Almay, Curve and others. Revlon then allegedly issued new senior lien loans on that intellectual property, ousting the 2016 lenders.

However, to close the deal, Revlon needed the approval of these lenders – lenders who at the time, according to UMB, were familiar with Revlon’s “looting techniques that were once burned in relation to the American crew.”

These lenders rallied in an effort to roll back the execution of the deal. An argument broke out; in June, the lenders tried to replace Citi with UMB Bank as the intermediary for the loan.

The conflict simmered all summer amid a pandemic and volatile stock markets. On a hot, stormy August day in the southern branch of the US District Court in New York, the situation was boiling in full swing.

On August 12, UMB Bank filed its lawsuit against Citi, Revlon, and others in that court on behalf of the lenders, alleging that the personal care company used intellectual property that served as collateral for Revlon’s 2016 loan to make a second loan back up Revlon went out in 2019.

The 117-page complaint cites a number of reasons why Judge Lorna Schofield on the case should decide in favor of the lenders. To hear this, Revlon “stole” the intellectual property of the lenders in 2016 and behaved “disloyal” and “nefarious”.

“We are fully convinced of our position as an agent and the complaint submitted,” said a spokesman for UMB via email.

The next day that Wall Street Journal broke the news that Citigroup two days earlier accidentally repaid Revlon’s lender nearly $ 900 million – all of the principal and interest the cosmetics company owed. As the diary reports that Citi has asked lenders to return the money. At least some of these lenders failed to do so.

“The lenders group had announced an event they wanted to be repaid and Citi paid them back,” a source familiar with the matter told II. The source added that it was unclear to them why the lenders were returning the money they owed would.

On August 17th, there were initial signs that Citi would not accept the non-repayment. That day the bank handed them over first of three lawsuits, alleged Brigade Capital Management “improperly tried to capitalize on the mistaken overpayment” by withholding the $ 175 million Citi paid days earlier.

According to Citi’s lawsuit, the bank intended to forward Revlon’s interest payment to Brigade, but instead paid more than 100 times the amount due on its accounting statement. Citi claimed there was “crystal clear evidence that the payments were made in error”. But in a letter to the court filed shortly thereafter, Brigade’s attorney argued that it was “unbelievable” that Citi could have mistakenly repaid the exact amount and interest.

So Brigade held onto the money. But thanks to the case judge Jesse Furman, the asset manager can’t do anything with it. Furman complied with Citi’s request to temporarily prevent the brigade from using the money for their own purposes. Instead, the brigade has to wait for the trial to end.

Citi’s problems didn’t end with the brigade. The bank has submitted another lawsuit on August 19 against two other managers, HPS Investment Partners and Symphony Asset Management. Citi made similar claims against the two firms, which the bank alleged inadvertently paid around $ 243.3 million in total.

On the day the lawsuit was filed, Citi’s attorneys hinted that more lawsuits would follow, although some of their lenders had begun repaying the money at their own request.

The third lawsuit arrived on August 21, covering nine other asset managers: Bardin Hill Loan Management, Investcorp Credit Management, Greywolf Loan Management, Zais Group, Allstate Investment Management, Medalist Partners Corporate Finance, Tall Tree Investment Management, New Generation Advisors, and Highland Capital Management Fund advisor.

The third complaint was similar to the first two Citi filed. The bank alleged that the nine defendants owed a total of $ 108.7 million. In all three cases the judge granted an asset freeze.

“While lenders have repaid hundreds of millions of dollars so far, some lenders have either refused or made no commitment to return the funds,” a Citi spokesman said via email. “All monies owed to Citi have now been either paid back or frozen by court order. We believe the law is on our side and that we will get the outstanding money back. ”

Still, the complaints remain hot. Even the investigation process – usually a mundane legal process in which both sides exchange evidence – is controversial. Citi’s attorneys are pushing for speedy proceedings, while lender attorneys take their time.

It is now up to the judge to decide when the trial will take place and who will ultimately keep the money. Until then, the $ 900 million remains in the balance.

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