Relevant Document:
Defendants’ Witness List
Testimony on day three of the trial in Citibank’s
suit to claw back mistaken
transfers to term lenders on Aug. 11 shined a spotlight on the investment fund defendants’ understanding of the payments and their responses in the aftermath of the mistake. The court heard today from Matt Perkal, a partner and senior analyst at Brigade Capital Management, and George Xanthakys, a senior vice president in the operations group at HPS Investment Partners.
Continue reading for the Americas Core Credit team's update on the Citibank mistaken transfers trial day 3 discussing Revlon's 'creative' efforts to address their capital structure, and request a trial for access to the defendants' witness list as well as our coverage of hundreds of other restructuring situations in the region.
Brigade’s Perkal maintained that on Aug. 12, he believed that the Citi payments may have been another one of Revlon’s “creative” tactics to address its capital structure. Moreover, media outlets had reported that UMB Bank, acting on behalf of the term lenders including Brigade, intended to file a
lawsuit against Citibank, Perkal noted. He said that at the time, he considered whether Revlon had paid down Brigade’s term loan holdings as a strategy to moot the lawsuit. Xanthakys from HPS described his reaction to Citi’s Aug. 11 payments and his internal and external communications about the transfers.
The trial will continue on Monday, Dec. 14, at 9 a.m. ET. Judge Furman said that given the number of witnesses left, the trial will likely spill over into Tuesday. The defendants have indicated that they have 14 witnesses to go.
Read Reorg’s coverage of the
final pretrial conference and days
one and
two of the trial.
Highlights from today’s witness testimony, and links to the witnesses’ declarations, are below.
Matt Perkal
John Baughman of the Law Offices of John F. Baughman, counsel for Citi, continued his cross-examination of Perkal today. Baughman pressed Perkal about the reasons described in his declaration that he believed the Aug. 11 payments were prepayments of the 2016 Revlon term loan rather than mistakes. One area of focus was Perkal’s statement that when he learned of the Aug. 11 payments, he considered whether Revlon had paid down the term loans to avoid a November “springing maturity.”
Baughman asked Perkal why Revlon would pay off the 2016 term loan for $893 million when the company could have repaid $387 million of 5.75% senior notes in order to avoid the springing maturity. When asked if it would be “a lot more economically rational” to redeem the notes instead of paying the term loan, Perkal answered, “No, not necessarily.”
Baughman also pressed Perkal on why he believed that Revlon could have paid down the term loans when a
10-Q released days earlier had estimated the company’s liquidity at $392 million as of July 31. Perkal’s declaration had addressed this issue, noting that
in May, Revlon raised nearly $1 billion notwithstanding its financial constraints and paid approximately $953 million of 2016 term loans at par. Perkal also highlighted media coverage of the so-called “Perelman put.” He explained that the phrase refers to “the view that [Ron] Perelman would not let Revlon fail.” Perelman owns almost 90% of the stock of Revlon Inc. through his company MacAndrews & Forbes LLC, and his daughter, Debra Perelman, currently serves as Revlon Inc.’s CEO, the declaration noted.
Today, Perkal confirmed that he believed Revlon was insolvent on Aug. 11 but noted that Perelman had injected capital to help Revlon “many times.” In response to Baughman’s questions, Perkal said that he has not communicated with Perelman about any such efforts. Perkal also commented that initially, he was unsure whether it was only Brigade’s term loan holdings that had been paid off. He learned that other term lenders had been paid through counsel later on Aug. 12, he said. Baughman, for Citi, highlighted language from the term loan credit agreement, saying that under the relevant provisions, it would be “impossible under the term loan to individually pay off Brigade” without paying the other lenders.
On redirect, Robert Loigman of Quinn Emanuel, counsel for the defendants, asked Perkal to say more about his reaction when he learned about the Aug. 11 payments. Perkal remarked that he assumed the 2016 term loan had been prepaid because “when a borrower makes a payment that’s not on the scheduled payment date, as was the case here, it has to be a prepayment.” He added, “I was certainly surprised. But that’s just the nature of an optional prepayment.” Perkal also commented that it was “certainly not atypical” to pay off a loan years before maturity.
As for where Revlon would have come up with the liquidity for a prepayment, Perkal said that the company has been in a stressed financial position since at least the 1990s, and Perelman has supported the company “many many times.” The company’s cash on hand as reflected in the Aug. 6 10-Q did not necessarily provide a full picture of the liquidity available to do transactions, he added. Again, he pointed to Revlon’s May transactions, which were the subject of the UMB suit filed on Aug. 12.
That a lawsuit was expected was “well understood by the marketplace,” Perkal said, since it had been written up in news reports. He added that on Aug. 11, Brigade was the largest 2016 term loan lender, so he thought that the paydown might have been Revlon’s attempt to “make us go away.” Perkal commented that after the May transactions, it was clear that Revlon was “very creative” in its tactics to address its capital structure. His belief was bolstered by the news on Aug. 11 that the company had
hired PJT Partners as financial advisor, he said.
On re-cross, Baughman asked Perkal why Brigade took no action after Aug. 12 to pursue the “list of grievances” outlined in the UMB complaint. “Because we were paid off, they were no longer relevant,” Perkal answered. He acknowledged that it was an “assumption” of the UMB complaint that the term loan was still outstanding, and that on Aug. 12, Brigade and other term loan lenders sent Revlon a notice of acceleration.
George Xanthakys
George Xanthakys, senior vice president in the operations group at HPS Investment Partners, described the back-office cash reconciliation procedures at HPS. He said that he learned about the Citi payments on the morning of Aug. 12 and received instructions that evening not to return the funds. Xanthakys described his external and internal communications regarding the transfers on Aug. 12, including an email that he sent to a BNP Paribas contact stating, “until further notice, please do not return our funds.” When Baughman asked if Xanthakys could point to any documents showing that anyone at HPS believed the Aug. 11 payments were “not a mistake,” Xanthakys said that he was not aware of any.