Shareholders need to know there migh be nothing left for them after bondholders are paid
Cosmetics giant Revlon’s (NYSE:REV) June bankruptcy filing attracted speculative investors hoping to cash in on headline volatility and possibly spark a short squeeze, but the chances stockholders will get much in any reorganization is slim.
Trading bankrupt companies’ shares is a well documented strategy that can be profitable, but timing is critical. It can yield big profit, but if one holds shares too long, they are likely to lose it all, as bondholders and creditors are in line ahead of shareholders.
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Revlon's Bankruptcy Filing
In early June, Revlon filed for voluntary bankruptcy, saying it needed to reorganize its capital structure, citing supply chain issues and other COVID pandemic issues. It noted at the time that it expected to receive $575 million in so-called debtor in possession financing to continue operating through the restructuring.
According to a Washington Post report, the pandemic amounted to the last straw for the company, as even before the COVID-19 pandemic, Revlon shares stock faced strong competitive headwinds from celebrity brands like Kylie Jenner's Kylie Cosmetics and Rihanna's Fenty Beauty. The report said that the two brands are more relevant to younger consumers, who gravitated toward the upstart rivals' social marketing prowess.
COVID-19 exacerbated Revlon's suffering as mask mandates crushed cosmetic sales, especially Revlon's core lipstick business. As the economy emerged from the mask issue, the subsequent supply chain issues hit large companies just as demand reemerged.
The stock's been off more than 60% for the year to date.
Yet, the stock still draws interest from traders and speculators.
Sixty percent of Revlon's float is now shorted. Current buyers may be hoping that the scarcity of shares would drive up their price if folks who shorted need to cover, a classic short squeeze. But that's playing with fire because, while stock can go no lower than zero, there's no limit to how high it can go or how long a short squeeze can last.
Revlon's short ratio, which measures how long it would take for the shorts to unwind their position, given historical trading volume, is just 3.16 days. That's not an exceptionally high number but reflects its high volume trading, over 22 million daily shares, on average.
In hopes of preserving value for themselves, shareholders asked government lawyers on July 13 to create an official committee representing equity holders' interests, citing the rally in its shares just after the filing. Official status for the committee would give shareholders a louder voice in settlement talks.
Interestingly, Revlon insiders have not gone anywhere near the stock in years, with the last trade from a com[pany executive recorded in June 2019.
Finally, CNN Business provided sage words for anyone thinking about speculating on REV stock. Usually, when companies declare bankruptcy, investors don't get anything from the subsequent reorganization. "Bondholders and other creditors are often first in line to get back some of their money, but stock holders usually have their investments wiped out once new shares are issued post-bankruptcy."
Article by Joshua Enomoto, Fintel
