Retail Army Defies Bond Logic To Drive Revlon Stock 600% Higher

He was thinking about companies like Hertz Global Holdings Inc., which filed for bankruptcy in 2020 and then became a retail-trader darling, or GameStop Corp., the struggling video-game retailer that came to epitomize meme-stock mania.

“I thought, screw it, maybe I’ll hit it big,” Brain said.

Then the bankruptcy hit — owner Ron Perelman finally turning to court protection with Revlon listing about $3.5 billion of debt — and Brain panicked, dumping his stake at an $8,000 loss.  

But in a moment that stunned debt traders and harkened back to the meme-stock craze at the height of the pandemic, Revlon soared. Brain wanted back in and on Tuesday plowed $31,000 into what should be nearly worthless stock. He more than doubled his money in 24 hours. 

Revlon shares spiked 596% in the six trading days through Wednesday before retreating 14% on Thursday morning. The surge makes little sense to professional traders, and is also strangely incongruous with the broader market, where everything from established companies to cryptocurrencies are getting crushed amid concerns over inflation and a more aggressive Federal Reserve. At a time when easy money and outsized stock gains are fading from memory, the move shows how some retail traders, encouraged by Reddit forums, are still able to move markets.

Hertz Precedent

“It’s somewhat bizarre,” said Bloomberg Intelligence analyst Phil Brendel of Revlon’s rally. The company would need to be sold or otherwise d at more than $4 billion in order for stockholders to see a recovery, he said in an interview. Any windfall would have to repay Revlon’s debts plus accrued interest, as well as whatever the company borrows to fund its bankruptcy, to say nothing of the pricey advisers who oversee a restructuring. 

Revlon’s unsecured bonds trade at around 12 cents on the dollar. This means that bond traders don’t expect they’ll get much of their money back, even though they rank ahead of the company’s equity holders. By all measures of bond mathematics, the equity should be toast.  

But there’s precedence for this type of situation.  

Hertz’s debt tanked after the rental-car firm filed for Chapter 11 protection, with one bond dipping to nearly 10 cents on the dollar at its trough in May 2020. In the weeks and months that followed, retail traders sent Hertz shares surging, with the stock gaining more than 500% in the first half of 2021.

Hertz tried to take advantage of the head-scratching rally by issuing more shares in bankruptcy, a move unheard of among insolvency advisers. They even got approval from the bankruptcy judge, though US regulators raised questions about the propriety of the move, scuttling the plan. 

The Reddit crowd that bid up Hertz was ultimately vindicated. Hertz creditors were eventually repaid in full and stockholders got a payout, too, after demand for used cars soared as a chip shortage squeezed automakers and travelers began hitting the road again. A bidding war emerged at the tail end of the bankruptcy that boosted the of the company. On Wednesday, the stock closed at $17.25. 

Revlon’s Future

Despite the similarities — both were well-known, down-on-their-luck brands — the bankruptcies of Hertz and Revlon are not particularly similar. Hertz was a relatively financially healthy company quickly sapped of money by a global pandemic. It managed to cash in on tight auto supplies and the resurgence of the US economy at just the right time.

Revlon, by contrast, has been laboring under a heavy debt load for years, suffering from declining sales and struggling to stay relevant in the face of growing online competition. It has repeatedly cut deals with lenders in a bid to stay viable and undertook an aggressive financing maneuver that may make its bankruptcy acrimonious.

Still, a bidding war for the company is not out of the realm of possibility, according to Brendel. Cosmetics industry competitors may be interested in buying up a rival, which has performed well when viewed without burdensome interest expenses, he said. Reliance Industries Ltd., controlled by Indian billionaire Mukesh Ambani, is reportedly weighing an offer.

“It’s a high hurdle, but really no one has put this company on the auction block for 37 years,” he said. “You’re going to see some interest in it.” 

But future prospects for the company aren’t the only factor, at least in the short term.

Leonardo Espinoza, an 18-year-old college student in the Bay Area, invested about $800 in Revlon stock and has already made $1,200. He plans to keep holding as long as other traders are buoying the price. 

“It’s a coordinated thing where social media platforms come together,” he said. “There’s a lot of retail investors like me who are young and try to look for a loophole in the market. People are really seeing the potential in this.”

(Adds Thursday’s share move in sixth paragraph)

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