Revlon’s decision to file for Chapter 11 bankruptcy protection will go further than restructuring debt without disrupting operations. Industry professionals say the move could have implications for more than 100 collateralized loan obligation (CLO) deals.
Nearly 140 CLOs rated by Moody’s Investors Service hold about $300 million of Revlon’s debt, according to Kevin Anthony, an assistant vice president at Moody's.
At current CLO prices, “there could be significant par erosion for CLOs from Revlon's bankruptcy filing,” Anthony added. Excluding deals nearing the end of their terms, fifteen transactions have exposures of 1.0% overall and peak at 5.8%.
Moody's announced several credit rating downgrades on outstanding Revlon debt. It moved the senior secured bank term loan to ‘C’ from ‘Ca’; its Corporate Family Rating (CFR) to ‘Ca’, from ‘Caa3,’; and its Probability of Default to ‘D-PD’ from ‘Caa3-PD’.
“Revlon has an unsustainable capital structure with reported debt exceeding 1.5x of annual revenue that left the company with limited financial flexibility, including high leverage, weak liquidity and looming maturities,” Moody’s analysts wrote on Thursday, June 16, 2022.
The CFR and the downgraded senior secured bank term loan reflect Moody's view on potential recoveries, as end-market consumer demand and cost saving initiatives only partially offset the company’s heavy debt burden.
At SGL-4, Revlon's Speculative Grade Liquidity and the outlook, remain negative. S&P Global also has the company on negative outlook.
Following the rating action Moody's announced plans to withdraw all the ratings of Revlon Consumer Products Corporation. Morningstar also does not cover Revlon, Inc., according to a spokesperson.
Not all industry observers share Moody’s point of view. About 5% of the $2.75 billion of Revlon term loans outstanding are held in CLOs assessed by Fitch Ratings, according to Derek Miller, Head of US Structured Credit, Fitch Ratings.
“The exposure for each CLO is typically below 0.5%, which means that individual loan defaults do not have a meaningful impact on the rating analysis of CLO notes,” Miller said.
Revlon’s new debt
Revlon’s Chapter 11 filing included plans for a $575 million debtor in possession (DIP) financing facility. The company’s existing lender base extended the financing, which will complement Revlon’s existing working capital facility in generating liquidity to support its day-to-day operations. “Our challenging capital structure has limited our ability to navigate macro-economic issues,” according to a statement from Debra G. Perelman, Revlon's president and chief executive officer.
Debtors expect bankruptcy court approval for a super-priority senior secured DIP asset-based loan (ABL) facility with maximum aggregate principal of $400 million secured through unspecified lenders, according to a Revlon form 8-K.
This DIP ABL facility also should provide for a $270 million asset-based, revolving credit facility, and a $130 million asset-based term loan whose proceeds will refinance certain debtor obligations.
Jefferies Finance serves as the administrative and collateral agent for the term DIP, while the MidCap Funding IV Trust is administrative and collateral agent for the ABL DIP.
