Revlon recently filed for bankruptcy under Chapter 11 in the U.S. But what is Chapter 11 and how does the filing impact the company?
On June 16, cosmetic products company, Revlon (NYSE: REV) announced it has filed a reorganization petition under Chapter 11 in the U.S. Bankruptcy Court. Revlon explained that the Chapter 11 filing will allow the company to strategically reorganize its capital structure, which will improve its long-term outlook.
Additionally, Revlon stated it was wrestling with liquidity constraints due to a rough macro-economic environment that include rising inflation rates, debt obligations, and supply chain disruptions. In fact, the company has more than $3.3 billion in debt obligations on its balance sheet.
What is Chapter 11?
A company generally files for bankruptcy under Chapter 11 as it reorganizes its debts and assets. Here, the company is not obligated to liquidate its assets and will maintain control of its operations, while focusing on the reorganization process.
It is used to reorganize a business and provides a window of opportunity for the company’s management team to regroup and get out of the woods. First, the debt collection process is temporarily stopped, offering much needed breathing space for the filer. In other bankruptcy chapters a trustee is appointed to oversee the liquidation process. But under Chapter 11, the company continues to operate its business and functions as a “debtor in possession.”
Revlon confirmed it expects to receive $575 million via debtor-in-possession financing from its lender base, providing it with liquidity to run regular operations.
The primary goal of Chapter 11 is to create a financial plan that will be agreed upon by all stakeholders. The plan should permit the company to function and may include restructuring of debt, lowering interest rates, or even foregoing debt obligations completely.
Several companies that file Chapter 11 may look to downsize operations and sell non-core assets which will improve cash flows and reduce costs.
According to Revlon’s press release none of its international subsidiaries are included in the Chapter 11 proceedings with the exception of Canada and the United Kingdom.
Chapter 11 is among the most expensive bankruptcy processes in the U.S. But it provides a chance for companies to restructure their business and offers financial flexibility which might allow it to stage a turnaround.
During the financial crisis of 2008-09, car manufacturers such as General Motors and Chrysler filed for Chapter 11. The Treasury Department of the U.S. provided loans worth $51 billion and $12.5 billion to General Motors and Chrysler respectively, to bail out of the companies.
The U.S. Treasury exited its investment in GM after recovering $39.7 billion while Chrysler paid back $11.2 billion to the government department.