Citi and Revlon Had Skirted Debt Agreement Before, Witness Says

Revlon Inc. lenders said it was easy to believe the cosmetics company was paying off a loan early when Citigroup Inc. mistakenly wired them $900 million in August, because they believed the pair had breached the debt agreement before.

“Nothing that both Citi and Revlon had done leading up to that point suggested they would follow any part of that credit agreement,” Scott Caraher, head of loans at Symphony Asset Management, told a judge on Tuesday.

Caraher was testifying at a trial over Citibank’s lawsuit seeking repayment of half a billion dollars from 10 asset managers whose clients hold the Revlon loan and have refused to give the money back. Among them are Symphony, Brigade Capital Management and HPS Investment Partners.

The credit pact required three days’ notice for an early full payment of the loan, for example -- notice the recipients of the Aug. 11 wire transfers didn’t get. But Revlon and Citibank “had really thumbed their nose” at the agreement, Caraher said, including in a May restructuring of Revlon’s debt.

Key Question

Citibank, the administrative agent on the loan, made the huge transfers out of its own pocket, in a botched interest payment that ended up including the full principal -- the biggest banking error in recent memory. It has since recovered about $390 million of the sum. It argues that the investment firms must return just over $500 million still outstanding since it was clearly sent in error and isn’t theirs to keep.

The firms say the transfers were the exact amount owed their clients under a 2016 loan to the struggling makeup company, which is controlled by billionaire investor Ronald Perelman, and that nothing about the payment led them to think it wasn’t intentional.

The trial, being held by videoconference without a jury before U.S. District Judge Jesse Furman in Manhattan, shines a light on a blunder that Citibank has already had to explain to federal regulators and that has forced it to tighten its controls. It has been closely watched on Wall Street, although the error was so egregious that it’s difficult to predict what impact the outcome will have on the industry.

In his testimony on Tuesday, Caraher described the relationship between Symphony, Revlon and Citibank as contentious and complicated.

‘Game of Chess’

“It’s not that we didn’t want to return the money,” he said. “We were just paid money that we were owed by a borrower and an agent who were involved in a significant game of chess.”

Caraher said he was approached in April by representatives of Perelman’s investment firm, MacAndrews & Forbes, with an offer to pay off Revlon debt his firm was holding. In exchange, Symphony would support a restructuring Revlon was trying to complete. When he asked where the money was going to come from, he was told that MacAndrews & Forbes would “take care of it,” which Caraher said he took as an indication it would come from Perelman.

In the end, Symphony didn’t lend its support to the restructuring.

Caraher testified that he gave the instruction to hang on to the money -- just over $110 million. He said he initially learned of “something potentially nefarious” going on at Citibank on the morning of Aug. 12, the day after the transfer, and asked John Vaughan, a senior loan operations associate, to investigate.

‘Entirely Consistent’

Vaughan “walked me through the fact that we had received our interim interest payment notice, which is always given right before a full paydown is made,” Caraher said under questioning by John Baughman, a lawyer for Citibank. “You have to true up the full interest you are owed.”

To learn more, Caraher said, he sought to buy $1 million of the 2016 term loan, a move that Citibank’s lawyers called out in a particularly sharp back-and-forth.

“I had no idea what was going on,” Caraher testified, saying he believed something “was being done to advance their own agenda and harm us,” so he “put a bid out in the market to try to get information.”

The paperwork they received with the payment was “fully and entirely consistent” with the way a full paydown is made, Caraher testified. He said his first thought when the transfer arrived was that Citibank and Revlon were selectively paying off lenders.

“You believed it would have been perfectly fine for Revlon to make a prepayment in a way not permitted under the credit agreement?” Baughman asked.

“That is something that happens in lots of other credit agreements,” Caraher said. He said he believes that Revlon and Citibank had ignored “a lot of provisions” of the agreement in the past, as in the debt restructuring.

Earlier on Tuesday, Vaughan testified that it’s standard practice to look into fund transfers made without notice and to return the money if it was sent in error. He said he had seen money sent by mistake to his firm or to counterparties before.

“We would review the wire, confirm it was a mistake” and, if “money was not owed, we would send it back,” Vaughan testified, under Baughman’s cross-examination.

And were mistaken interest payments common, Baughman asked.

“Yes,” Vaughan replied.

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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