REV - Filed for bankruptcy this week

So this seems to be an interesting case, where the stock is rallying after filing for Chapter 11 bankruptcy. It’s very rare for shareholders to be left with much after a bankruptcy case is resolved, and there seems to be an extremely big disconnect between the stock price and their bond price right now. Throw into the mix a potential takeover offer that was speculated on today, and we have an interesting situation.

As of today, the stock closed at $3.73, which is approximately 25% of it’s 52W high value
The bond (there is only 1 bond outstanding, a 6.25% maturing on 8/1/24 that is now officially defaulted) is currently trading at 7 cents on the dollar.
So there seems to be an extreme disconnect in the relative value here. Any resolution to the current bankruptcy situation that leaves shareholders with any real value left would mean bondholders are likely made whole. The stock seems to be getting pumped right now for no real good reason while the bond value remains relatively low (this kind of makes sense, since bonds don’t really get pumped). If the acquisition rumors pan out, if shareholders receive anything more than a few cents, the bonds will likely be made whole as well (for one, the bond has a change of control covenant, even if that’s waived the fact a large financially stable company is taking over the debt would make it worth close to par).

I put on a trade for this which involved selling around 50 contracts of naked calls at 2.5 and 5 strikes for varying months, and buying 30K par value of the bonds (1K par value costs about $70 to buy right now).
So the likely possible outcomes for this trade are:

  • Bankruptcy case proceeds, shareholders are likely wiped out, bondholders get a piece of the company. (Probably not a very large piece though, there are secured creditors that are higher on the pecking order than this unsecured bond)
  • Bankruptcy case proceeds, shareholders retain a substantial amount of equity, bondholders are made whole (or close to it). This case seems extremely unlikely given the economic climate and the fact the company’s insolvent
  • Buyout occurs where shareholders receive something more than a few cents for their stock. Bondholders are likely made whole
  • Buyout occurs where shareholders receive close to nothing (or nothing), creditors agree to settle for less than what they’re owed because it’s better than what they’d likely receive through bankruptcy. This scenario is a reasonable possibility because 1 holder owns 85% of the stock. If they agree to it then public shareholders get no say (kind of like how RDBX’s controlling shareholder agreed to that awful merger, because otherwise the company is probably going to go bankrupt)

By shorting calls and buying bonds, the bonds are heavily favored in pretty much all these situations in the long run. The obvious big risk is that the stock pumps in the short run while the bond doesn’t follow. (The good old saying, the market can be irrational longer than you can stay solvent applies here). It’s highly unlikely that any acquisition would occur at a price more than a few dollars per share especially in this market, and the unique situation that occurred with the Hertz bankruptcy doesn’t really apply here because Revlon doesn’t have a fleet of cars that’s appreciating in value to sell, so it’s unlikely that shareholders would leave bankruptcy proceedings with much.

Any bankruptcy play is extremely high risk, and I don’t fully understand all aspects of it either, I’m learning as I go here.