It was hardly the role Citigroup Inc.’s bankers signed up for when they helped Ron Perelman’s Revlon Inc. borrow $1.8 billion in 2016. But, now a back-office blunder is leaving the financial behemoth faced with the prospect of becoming one of the biggest creditors to the troubled cosmetics empire.

A surprise ruling by a New York judge on Tuesday blocked Citigroup’s efforts to recover $500 million it had mistakenly sent Revlon’s lenders last year as the so-called administrative agent on the company’s loan. While the bank says it will appeal the decision, a failure to overturn it will leave Citigroup holding the bag on the bulk of the $900 million remaining on the loan that Revlon hasn’t itself paid.

“Revlon’s loan was never paid off. So if appeals fail, Citi will ultimately step into the shoes of the lenders and own $500 million of that nearly $900 million term loan.” said Philip Brendel, a senior distressed debt analyst at Bloomberg Intelligence.

Representatives for Citigroup and Revlon declined to comment.

In an extra twist of irony, Citigroup would also be holding a loan that — just nine months ago — Revlon’s lenders had accused the cosmetics company of defaulting on when it moved certain intellectual property to receive another loan. In that situation, the angry creditors had sent the default notice to Citigroup as administrative agent.

Agent Job

The typically sleepy loan agent role tasks a bank with collecting and distributing interest payments, managing amortisation schedules and providing other housekeeping services while maintaining contractual obligations to both a borrower and its lenders. It isn’t high-fee work, but is seen as necessary to gain more lucrative underwriting and advising mandates.

Administrative agents have been sued by aggrieved borrowers before, and they’ll often resign when creditor disputes get heated, citing guidance from credit agreements borrowers enter with their lenders.

Tuesday’s ruling thrusts Citi in an unlikely position alongside the likes of Highland Capital and Investcorp Credit Management, Revlon lenders that received the mistaken payment but opted to return the funds. Firms including Brigade Capital Management, HPS Investment Partners and Symphony Asset Management were dealt a victory after keeping the transferred money, effectively making them whole on their investments.

What’s more, Citi effectively paid in full for a deeply distressed loan. The debt, which is due in 2023, was last quoted at around 43 cents on the dollar, according to data compiled by Bloomberg, raising the possibility that the bank could take another hit if it has to mark the position down to current levels.

Fight Continues

“An interesting question remains in the wake of this opinion,” Columbia Law School professor Eric Talley said in an interview. “Does Citibank now try to recover from Revlon? In other words, they might claim they have purchased the loan from the lenders, and now Revlon owes Citibank.”

Revlon has been struggling to stem falling sales and fend off upstart beauty companies. The pandemic made its finances worse as customers staying at home had fewer reasons to buy new makeup.

The fight over the mistaken transfer is far from over. Citi has vowed to appeal the case, and Brendel said future lawsuits against Citi and Revlon are also possible.

For now, the firms can keep the money, pending an appeal, but can’t spend it, US District Judge Jesse Furman ruled. The judge said prior court decisions forced him to conclude that the lenders were entitled to hold on to the money.

“I’m pleased the clients’ decision to retain the funds, not withstanding Citibank’s demand to have them returned, has been validated by the court” applying previous legal precedent, Ben Finestone of Quinn Emanuel Urquhart & Sullivan said.

Representatives for Brigade and HPS declined to comment. Symphony didn’t immediately return messages seeking comment.

By Katherine Doherty.