The Impact of Capital and Legal Structure on The Bankruptcy Process of Revlon
According to Tarver (2021), bankruptcy is a judicial action involving a person or business in which debts have accumulated and the person or firm is unwilling or unable to pay its existing bills. Companies that fail to meet their financial responsibilities might submit a petition to liquidate the firm to pay creditors or reorganize the debtor’s business activities, debts, and assets, either voluntarily or involuntarily (Dollarhide, 2021).
The Bankruptcy Process
The bankruptcy process typically begins with a petition filed by the debtor or on behalf of creditors. The debtor’s assets are appraised and sold, and the earnings are utilized to pay off a portion of the existing debt ( The Investopedia Team, 2021).
According to Norris (2022), there are two types of bankruptcy that are Chapter 7 and Chapter 11. In a Chapter 7 bankruptcy, a company’s assets are liquidated to pay its creditors, with bondholders receiving priority over regular stockholders. A trustee is appointed to sell a company’s assets and pay its creditors (Kenton, 2022)
In a Chapter 11 bankruptcy, the business continues to function while being reformed by a court-appointed trustee with the goal of emerging from bankruptcy as a sustainable firm (Dollarhide, 2021).
Capital Structure
The capital structure of a corporation is the fair and equitable distribution of its debts and its comparable or surpassing equity, which may include reorganizing the company to enable it to stand steady and emerge strong in market share (Tarver, 202). Tuovila (2022) stated that capital structures, in simple terms, are the channels such as raw materials, land, labor, or even energy or debts utilized to fund a company’s expansion to operations.
Legal Structure
Legal structures are the modes or ways in which a business is accepted to be registered at its conception or beginning stage, and they range from private or public limited corporations, sole proprietorships, to partnerships (Tuovila, 2021).
How these structures can impact Revlon’s progress through their bankruptcy process
In this discussion, I would love to discuss about Revlon. Revlon, one of the world’s largest cosmetics companies, declared Chapter 11 bankruptcy in June 2022. The filing comes at the conclusion of difficult several years for the firm, which was already dealing with dwindling revenues when the pandemic broke out. Covid-caused supply chain interruption exacerbated the problem, making it more difficult for the firm to manage its debt load. In addition to macroeconomic difficulties, Revlon was finding it increasingly difficult to attract younger consumers (CB INSIGHTS, 2022).
Revlon’s assets and liabilities range from $1 billion to $10 billion (CB INSIGHTS, 2022). As shown in a securities filing, Revlon had $3.31 billion in long-term debt as of March 31. Its 2020 sales of around $1.9 billion were 21% lower than in 2019. As for capital structure impacts, Revlon relies heavily on debt to fund its operations and that is one of the reasons for its bankruptcy since interest payments erode profits while decreasing a company’s taxability. Companies should have an optimal balance of equity and debt financing since greater debt financing raises the weighted average cost of capital, which adds to bankruptcy expenses as the likelihood of default rises (Tarver, 2021).
The legal structure impacts Revlon, as they’ve obtained court clearance for further debt, with an extra $375 million on the way to help buy time to reorganize the company.
Conclusion
It is crucial to emphasize that the majority of organizations that declared bankruptcy were able to find relief by taking advantage of the chance for a fresh start. While this may not appear to be a benefit, filing for bankruptcy usually enables the company to start afresh.
If properly carried out, Revlon might emerge from bankruptcy with a cleaner balance sheet and a stronger operational profile, perhaps increasing long-term business prospects.
References
CBINSIGHTS. (2022, October 18). List of retail company bankruptcies & closing stores. CB Insights Research. Retrieved November 13, 2022, from https://www.cbinsights.com/research/retail-apocalypse-timeline-infographic/
Dollarhide, M. (2021, October 30). What is Chapter 11 bankruptcy? Investopedia. Retrieved November 13, 2022, from https://www.investopedia.com/terms/c/chapter11.asp
Doyle, J. P. (n.d.). Is bankruptcy right for me? | Bankruptcy lawyer in Chicago. FightBills. https://www.fightbills.com/bankruptcy/faq/is-bankruptcy-right-for-me-/
Kenton, W. (2022, March 28). What is Chapter 7? Investopedia. Retrieved November 13, 2022, from https://www.investopedia.com/terms/c/chapter7.asp
Norris, E. (2022, June 21). Chapter 7 vs. Chapter 11: Know the Difference. Investopedia. Retrieved November 13, 2022, from https://www.investopedia.com/ask/answers/differences-between-chapter-7-and-chapter-11/
Tarver, E. (2021, May 31). How bankruptcy costs affect a company’s capital structure. Investopedia. https://www.investopedia.com/ask/answers/061515/how-do-bankruptcy-costs-affect-companys-capital-structure.asp
The Investopedia Team. (2021, May 31). What you need to know about bankruptcy. Investopedia. Retrieved November 13, 2022, from https://www.investopedia.com/articles/pf/07/bankruptcy.asp
Tuovila, A. (2022, June 18). Capital structure definition, types, importance, and examples. Investopedia. Retrieved November 13, 2022, from https://www.investopedia.com/terms/c/capitalstructure.asp
Note:
This article is written based on University of The People Financial Management (BUS 5111) written assignment by Fristy Tania in November 2022
