Revlon Bonds Are in the Tank. It’s a Bad Sign for the High-Flying Stock.

The soaring shares of bankrupt cosmetics business Revlon REV +34.32 percent and its fallen bonds are now at odds with one another.

Some Revlon debt trades at distressed levels of roughly 10 cents on the dollar, which shows fixed-income investors’ scepticism regarding the debt’s ability to be recovered throughout the bankruptcy process. Investors should use caution when purchasing Revlon stock because the beauty company’s debt is senior to its equity. In court-approved reorganisation schemes, shareholders in failing corporations sometimes receive next to nothing.

However, shares of Revlon (ticker: REV), which filed for bankruptcy on June 16 due to its high debt load, extended their recent rise on Wednesday despite what appears to be retail investors’ buying. After reaching a high of over $10, the stock increased 34% to $8.14 on a significant volume of 175 million shares. The company’s market value is currently close to $450 million.

On Tuesday, also on high volume, the stock, which had last closed at $1.17 on June 13, increased 62 percent to $6.06. Volume was at a few hundred thousand shares each day prior to the bankruptcy filing.

Retail investors’ enthusiasm for Revlon is reflected in the soaring stock price, as is the fact that there aren’t many shares available for trade. 85 percent of the 54.5 million outstanding shares, or 46.2 million, are owned by chairman Ron Perelman. Nine million shares are left in the public float after this, and according to Bloomberg data, about three million of those shares have been sold short.

Retail buyers are hoping that Revlon will find a buyer and that the stock will rise dramatically like Hertz did last year. As the rental-car market drastically recovered during the bankruptcy, that stock increased in value from under $1 to around $9, allowing lenders to be fully repaid and giving significant recovery value for equity investors.

However, Revlon bonds don’t imply that kind of optimism. According to TRACE, which compiles statistics on trading of corporate bonds in the over-the-counter market, they traded on Wednesday at distressed levels: the company’s $450 million of 6.25 percent debt due in 2024 was changing hands for about 10 cents on the dollar.

The Revlon bonds do not have a ticker symbol, but they do have an identification number, or Cusip, of 761519BF3. Financial authorities created TRACE—Trade Reporting and Compliance Engine—to open a window into the murky corporate bond market.

Debt appears to be a better investment than equity for individuals who are optimistic about Revlon’s future. Although the present price suggests pessimism that this happen, investors could profit tenfold if the loan is fully repaid. If the recovery value exceeds the current price, investors could profit even if the loan isn’t fully repaid.

As a hedge against losses if the bond price falls any more, some professionals might be buying Revlon debt and shorting the company.

With debt of around $3.4 billion and monthly interest costs exceeding $240 million, Revlon has had difficulty in recent years. Sales of $480 million in the first quarter were up 7.8% from the same period last year, but it lost $67 million in part because of high interest costs.

As of March 31, their debt exceeded ten times the $293 million projected 2021 earnings before interest, taxes, depreciation, and amortisation. While more ambitious businesses would go to a debt-to-Ebitda ratio of approximately five, the majority of businesses prefer to maintain it under three.

Revlon made mention of its debt issues when it declared bankruptcy last week. According to the company, “the Chapter 11 filing will enable Revlon to strategically reorganise its legacy capital structure and enhance its long-term outlook, especially amid liquidity constraints brought on by persistent global challenges, including supply chain disruption and rising inflation, as well as obligations to its lenders.”

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