For Firms That Got Citi’s $900 Million, It’s a Shot at Payback

By Lisa Lee, Sally Bakewell, Katherine Doherty and Jenny Surane | August 20, 2020

If Citigroup Inc. was looking to create a drama big enough to compete with the pandemic and U.S. elections for Wall Street’s attention, it couldn’t have written a better script.

The bank allegedly facilitated a debt deal that left a group of lenders fuming, then accidentally sent those firms hundreds of millions of dollars that it had to, politely, ask to be returned.

It’s little surprise that at least three firms, Brigade Capital Management, HPS Investment Partners and Symphony Asset Management are refusing to return the cash. Market watchers say Citigroup’s flub not only offered them a long-shot chance to recoup more than $400 million they claim they’re duly owed, but also a rare opportunity to inflict pain on the bank with very public, very embarrassing courtroom battles.

Brigade has made little secret of the antipathy it harbors for Citigroup for its alleged role aiding cosmetics giant Revlon Inc. in stripping away collateral from term lenders and using it to back new debt. Not only does it fault the bank — as the loan’s administrative agent — for facilitating the transaction, but moreover it accuses Citigroup of helping Revlon create a credit line to manipulate a lender vote and override the objections of a majority of debtholders to secure the deal.

“I’d be furious, and I’ve been in the spot where as a first-lien lender someone is trying to prime me in a gray area in the documents,” said Adam Cohen, managing partner at Caspian Capital, which oversees about $3.7 billion. “The ethics and morality of the lending market have gone to waste. It’s a disappointing sign of the times.”

Representatives for Citigroup, Brigade, HPS and Symphony declined to comment amid the ongoing litigation.

The feud is the latest in a series of credit-market brawls that have broken out as the pandemic triggers a wave of restructurings. Rising corporate distress is pitting beleaguered companies, their sponsors and lenders against each other in fights many say are uglier, dirtier and more vicious than ever before. Now, loan agents — the seemingly sleepy back-office bookkeepers — are being accused by a growing number of lenders of acting less like neutral middlemen and more like borrower benefactors.

Banks, for their part, say their actions are guided by the credit agreements corporate borrowers enter into with lenders.

‘A Circus’

Administrative agents are generally tasked with collecting and distributing interest payments, managing amortization schedules and providing other housekeeping services. While that typically commands only a marginal fee, it’s nonetheless a necessary service to secure more lucrative underwriting deals.

Mistaken payments are rare but not unheard of in the business, especially when companies are in the process of restructuring. Normally money managers simply return the funds. But the displeasure over Citigroup’s role in helping Revlon is prompting lenders to play hardball. Revlon had sought a $1.8 billion debt overhaul in April, which creditors including Brigade and HPS organized to block.

The deal needed approval of over 50% of the holders to close. At first, opposing lenders held a blocking position with a majority of the outstanding loan amount opting out. But with the approval of Citigroup, Revlon secured a new $65 million revolving credit facility from the supportive lenders — which the company says was permitted under its covenants — ultimately giving it enough backing to push the deal through.

“I have certainly never seen anything like this,” said Jenny Warshafsky, a covenant analyst at Xtract Research. “The 2020 deal was incredibly aggressive in itself, so it’s no surprise that it’s being challenged by the lenders. The overall situation was already unusual before there was, by happenstance, this clerical error. It’s a circus.”

‘Curry Favor’

In recent years, loan agents have been at the center of a number of high-profile disputes between borrowers and lenders.

A month ago Citigroup was involved in a feud between AMC Entertainment Holdings Inc. and its creditors over the cinema chain’s debt overhaul. A group of loan holders claimed the company violated the terms of its credit agreement for failing to provide adequate financial and legal information about the transaction and why it was allowed under the debt documents.

The group also asked Citigroup to resign as administrative agent for alleged failure to fulfill its role and allow AMC’s deal to proceed, Bloomberg previously reported.

Brigade was a part of the dissenting lender group in the AMC feud as well, according to people with knowledge of the situation who asked not to be identified because the details are private.

JPMorgan Chase & Co. drew the ire of investors less than a year ago when the bank provided a revolver to Peabody Energy Corp. that gave the company and lenders supporting a joint venture with Arch Coal Inc. enough clout to override any objections of existing term loan holders. The move came the same day Peabody switched the administrative agent on the loan agreement to JPMorgan from Goldman Sachs Group Inc.

“Legally speaking, the administrative agent is supposed to be passive and not take sides, reverting to an almost clerical role,” said Elisabeth de Fontenay, a professor at Duke University School of Law and a former corporate lawyer. “But that is often not the reality at all. There is something behind the market feeling that admin agents favor the borrower. It is largely because they get such high fees for arranging these transactions — they want to curry favor.”

To be sure, loan agents have also been sued by aggrieved borrowers as well, and many will often simply resign their role when creditor disputes get heated.

“This will be a wake up call to agent banks. Is it worth being in this predicament where you are caught in the middle between sophisticated lenders and borrowers?” said Enam Hoque, an analyst at Moody’s Investors Service. “I wouldn’t be surprised if this has some shock waves.”

Some in the industry argue that banks such as Citigroup are trying to serve too many masters. In fact, Citigroup on Tuesday resigned as lead arranger for a collateralized loan obligation managed by Brigade amid the escalating legal dispute.

The agent role is better left to more neutral third parties, said Renee Kuhl, executive director of the loan agency group for SRS Acquiom, whose unit competes with Citigroup for those mandates.

If the agent is “a larger investment bank that’s involved behind the scenes with a lot of other lending structures within the company, that’s when you see a lot of these situations appear where people are not happy,” she said.

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