Jun 24, 2022 - Economy

Meme stock crowd targets bankrupt Revlon

Animated illustration of a tube of lipstick rolling up to reveal a hundred dollar bill.

Illustration: Aïda Amer/Axios

Meme stock traders have a new favorite stock: Zombie cosmetics company Revlon, which filed for bankruptcy protection last week.

Driving the news: Its shares — which face the very real prospect of being wiped out in bankruptcy proceedings — have caught fire. They're up 615% since their low point last week.

Why it matters: This isn't typically the market reaction after a company acknowledges it's insolvent and files for Chapter 11 protection.

How it works: Bankruptcy court is where a company that doesn't have enough money to pay everyone is allowed time to figure out who will get paid what. Creditors — like bondholders and lenders — would have to get their money back in full before the shareholders see a dime.

  • If there’s nothing left for shareholders, they take a zero. This happens all the time in bankruptcy court.

Flashback: Hertz became an O.G. meme stock after its 2020 bankruptcy when a Robinhood-fueled rally catapulted its shares, which Wall Street pros had deemed virtually worthless.

  • Retail investors proved the haters wrong when shareholders recouped a tidy payout as part of Hertz’s bankruptcy plan.

Yes, but: Retail traders who want to replicate the Hertz win with Revlon could be in for a rude awakening.

  • Hertz filed for bankruptcy at a unique moment in time — May 2020, basically the economic nadir of the pandemic. Its business had ground to a halt thanks to COVID-19 lockdowns, ultimately triggering what amounted to a freak margin call in its intricate stack of asset-backed debt.
  • A few months later, with the economy awash in fiscal and monetary stimulus, summer weather beckoned lockdown-grizzled America out onto the road. Hertz actually had a business again.

But while Hertz was an indebted company that couldn't make its payments because of a once-in-a-lifetime pandemic, Revlon has been a poorly performing debt zombie for years. It previously completed distressed debt exchanges in an attempt to put off the inevitable.

  • Its brick-and-mortar strategy of selling in drug stores failed to help it grow enough to service its debtload, as cosmetics sales shifted to online and direct-to-consumer models.
  • And, zooming out, back when Hertz filed the market was headed into an upswing — good for valuations — while now, we're barreling through bear territory.

These differences make it less obvious that there's a temporary, Hertz-like valuation discount for Revlon shareholders to take advantage of, or a catalyst for a quick bounceback in the business.

  • One wildcard: Fixing problems in its supply chain could unlock some value. But to really invest in that, Revlon would need to shed its overbearing, cash-gobbling debtload ... which by definition won't happen in time to hand shareholders a recovery in a bankruptcy plan.

What the bond market says: Distressed debt hedge funds are in the business of buying bonds of bankrupt companies at huge discounts — say, 30 cents on the dollar — with the expectation they’ll get paid back a lot more in the end. Maybe not 100 cents on the dollar, but enough to pocket a nice profit.

  • In Revlon’s case, some of its bonds — which, again, are supposed to get paid back in full before any money goes to equity holders — are trading at just 5 cents on the dollar, according to BondTicker.
  • Translation: The savviest bankruptcy investors on Wall Street — who, by the way, are salivating for investment opportunities after two years of artificial Fed support propping up zombie companies — don’t think Revlon’s bonds are going to eek much more than pennies on the dollar out of a bankruptcy plan.

The bottom line: Of course, Wall Street's savviest could be wrong. They were wrong in Hertz, after all.

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