Revlon Stock’s Wild Chapter 11 Ride – Is The Tiny Free Float Responsible?

Revlon (NYSE: REV) stock had another gaining session yesterday, 62% up, and is another 28% up premarket. This is an absurdity for a stock – as Revlon is – in Chapter 11 bankruptcy. As we've said before Revlon stock should trend to zero in Chapter 11. The debt burden is such that junior bonds are trading well off par, indicating that there's most unlikely to be any recovery for equity.

But that's not the way the markets is trading and prices are information. So, we've got to try and work out what information these odd price movements are giving us. Revlon stock just keeps going up in bankruptcy.

There is that lovely story of the Citi goof. They were supposed to transmit interest payments to varied hedge funds who held Revlon debt back last year. By mistake they sent the entire $900 million of the outstanding debt. Given that even back then no one thought Revlon would pay off its debt at par the recipients refused to hand the cash back. The courts sided with them on this. This is fun and interesting and will be shouted about within the Chapter 11 proceedings but it's not hugely relevant. Even if matters stay as they are Revlon's still not solvent.

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So, what is it that is giving Revlon stock some positive value – that strongly rising positive value? One thought is that perhaps this is going to work out like Hertz did and there will, in the end, be some equity value. But that wasn't just because Hertz became a meme stock – it was really the reversal in used car values that did that. Low resale values and the inability to provide margin calls killed Hertz, then while in bankruptcy such values recovered.

This isn't going to happen at Revlon, there's no such change in capital valuations floating around. So, what is happening then?

One useful idea is that yes, people are playing it as if it is one of those meme stocks. But even that requires that there be some structural background which allows such trading to take effect. And one idea is how small Revlon's free float actually is.

Sure, there are some 54 million shares outstanding. But insiders and an investment fund own 48 million of those, (all rough numbers) there are only just over 7 million in the free float. With a share price in the low single dollars level that means that just tens of millions of $ of trading can have a huge influence on the price. And there is vast trading here. Last Friday saw 146 million traded on that 7 million float.

It's also true that the short interest is about 53%. But that's 53% of total issuance, not just the free float. So, there's significant opportunity there for a short squeeze to take place – which brings us back to meme stock ideas like what happened at GameStop and AMC.

Now, exactly what is happening in Revlon stock isn't really knowable at present. But the secret could well be in that very small float as opposed to market volumes. When the daily turnover is 10x and 20x the free float near anything can happen to a stock price.