Citi Lawyer Suggests Revlon Loan Payment Wasn’t a ‘Rational’ Act

Why would billionaire investor Ronald Perelman spend almost a billion dollars paying off a Revlon Inc. loan in August when he could have met an obligation of less than $400 million instead?

That’s what a lawyer for Citigroup Inc. wanted to know from a hedge fund partner at one of the firms refusing to give back money the bank wired them this summer in a $900 million mistake.

Citi Lawyer Suggests Revlon Loan Payment Wasn’t a ‘Rational’ Act

The question, posed on the third day of a trial over Citibank’s effort to recover hundreds of millions of dollars from its Aug. 11 debacle, was aimed squarely at the central issue in the case: Did the recipients know the payment was a mistake?

“Do you believe Perelman to be a rational businessman?” John Baughman, a lawyer for the bank, asked Matthew Perkal, a partner at Brigade Capital Management and a witness for the defense. Wouldn’t paying $387 million of notes “be more economically rational” than suddenly paying down almost $900 million in loans, he asked.

‘Playing in the NBA’

Citibank has recovered about $390 million of the August transfer and sued 10 asset managers for creditors that have refused to return $508 million. At the trial, lawyers for the bank have been pressing executives for the investment firms on the struggling cosmetic company’s capital structure and ability to pay down its debt load.

At the time of the transfer, Revlon had bonds outstanding that would have triggered the payment of more than $1 billion of secured debt in November. All it had to do to avoid this “springing maturity” was to pay off the bonds before the November deadline, Baughman said during his cross-examination of Perkal.

Perkal pushed back, suggesting there were a lot of things Perelman might have done or not done.

“There is nothing preventing me from playing in the NBA,” he said. “But it’s not going to happen.”

Citibank, which was acting as administrative agent on the Revlon loan, made the transfer out of its own pocket. It says it accidentally wired the huge sum while trying to make a periodic interest payment, including to some creditors that had been locked in a battle with Revlon over a debt restructuring.

Wall Street Watching

The creditors say the transfers were the exact amount owed their clients under a 2016 loan to Revlon and that nothing about the payment led them to think otherwise. Among the 10 firms the bank has sued are Brigade, Symphony Asset Management and HPS Investment Partners.

The trial shines a light on one of the biggest and most embarrassing banking errors in recent memory -- one that has already forced Citibank to explain its mistake to federal regulators and tighten its internal controls. The case is being closely followed on Wall Street, especially in the syndicated loan industry.

At the trial on Friday, Perkal testified that an injection of capital by Perelman “was certainly a possibility, and it’s happened many times.”

“We knew they were very creative,” he said of Revlon. “We knew they made pro rata payments in the past. We thought they had violated the credit agreement. We thought they had found the flexibility.”

Never Seen It

Under questioning by lawyers for the defendants, including his own firm, Perkal said he didn’t think the transfer was a mistake. Out of the thousand or so loans he has handled at Brigade, he said, the “vast majority” have been fully paid off well before the maturity date.

“It’s not something that would pop into my head,” he said of the error. “I was certainly surprised. I didn’t expect this payment. But that’s just the nature of an optional prepayment.”

Perelman’s firm MacAndrews & Forbes owns more than 80% of Revlon. The 77-year-old billionaire has launched a string of divestitures in recent months. He put his Manhattan mansion, prizes from his art collection and his superyacht on the market, Bloomberg has reported.

The case is Citibank NA v. Brigade Capital Management, 20-cv-6539, U.S. District Court, Southern District of New York (Manhattan).

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