Avon Products Inc. (API), a New York-based holding company of the Avon beauty brand, filed for Chapter 11 Bankruptcy in the District of Delaware on Monday, August 12.
This action comes as the company seeks to address 386 talc-related lawsuits alleging that their products caused cancer.
The bankruptcy filing does not affect the beauty brand's operations in the United States, Canada, and Puerto Rico, which are run by The Avon Company (formerly New Avon LLC), owned by LG Household & Health Care Ltd.
In a statement sent to Esquire Philippines, Avon Philippines clarified that "nothing changes for [their] customers."
Read: Kathryn Bernardo marks 28th birthday as first-ever Filipino ambassador for luxury brand Lancome
Full Statement of Avon Philippines
"Avon Products, Inc. (API), recently initiated voluntary U.S. Chapter 11 proceedings, which will allow API to resolve its debt and legacy liabilities. As this legal process involves only our holding company, Avon's operations outside the U.S. are not part of the proceedings and will not be impacted.
Importantly, this means nothing changes for our customers, Associates, Representatives, or other stakeholders across our markets. At Avon, it is business as usual as we continue advancing our strategic initiatives while providing customers worldwide with the same personalized beauty experience that they know and love."
ALSO READ: What Exactly Does it Mean When a Company Files for Bankruptcy?
What is a Chapter 11 Bankruptcy?
By definition, bankruptcy is a legal process opted by people and businesses that can no longer pay their debts to seek relief from some or all the money they owe.
It is initiated by the "Debtor" and imposed by a court order.
Chapter 11 Bankruptcy, which, as the name suggests, comes from Chapter 11 of the United States Bankruptcy Code.
Unlike Chapter 7 Bankruptcy, which involves liquidating assets to pay off creditors, Chapter 11 aims to keep the business alive and retain the debtor's ownership and control of the company while negotiating to pay the debt over time.
This form of bankruptcy is particularly relevant in today's economic climate, where many businesses face financial challenges due to high interest rates, inflation, and the lingering effects of the COVID-19 pandemic.
In the case of API, it's a strategic move aimed at resolving its debt and legacy talc liabilities.
Avon, Avon Products Inc., and The Avon Company
Avon was founded in 1886 by David H. McConnell, then a door-to-door book salesman who gifted perfume samples to potential book buyers.
As expected, the perfume became more popular than the books, and McConnell took the opportunity to create Avon and sell perfume instead.
The company eventually expanded to other beauty and cosmetic products.
On January 27, 1916, Avon Products Inc. was incorporated in New York; in 1946, API became a public company; in 1964, its stocks were listed on the New York Stock Exchange.
API entered into definitive agreements with affiliates of Cerberus Capital Management L.P. to separate from its North American business in December 2015.
This includes operations in the United States, Canada, and Puerto Rico, which were effectively separated from API on March 1, 2016.
Since 2016, API has not sold any products within the United States, and all of the Company's consolidated revenue is derived from operations outside of the United States through Avon Non-U.S.
New Avon LLC became a privately held company, majority owned and managed by Cerberus NA Investor LLC, an affiliate of Cerberus, with 20% ownership interest by API.
In August 2019, API and Cerberus finalized the sale of their interests to South Korean consumer goods company LG Household & Health Care Ltd.
New Avon Company changed its corporate name to The Avon Company in January 2021.
As for API, the company, on May 22, 2019, entered into a merger agreement with Natura Cosméticos S.A., Natura, and two subsidiaries of Natura, making API a direct wholly owned subsidiary of Natura.
API remained a publicly traded company until January 3, 2020, when its common stock was converted to Natura common stock.
API, as of writing, conducts operations in about 50 countries and territories and licenses its products in 10 other countries and territories.
Avon Products Inc.'s Chapter 11 Petition
Philip J. Gund, Chief Restructuring Officer and Treasurer of Avon Products Inc., indicated in the court filings that API, along with Avon Capital Corporation, AIO US Inc. (formerly Avon International Operations Inc.), and MI Holdings Inc., are entering the proceedings as "Debtors."
It added, "Avon's operating businesses, which are all under the scope of Avon Non-U.S., are not part of these Chapter 11 cases."
The Debtors, it also indicated, are "not affiliated with The Avon Company (Avon North America), which was spun off in 2016 and is today owned by LG Household & Health Care Ltd."
Sun Moon, CEO of The Avon Company, echoed this in a press statement released on August 13.
The statement clarified: "We understand there is confusion about our business structure and want to reassure our Representatives and customers that The Avon Company is operating as usual.
"The Avon Company has charted its own course under our parent company LG H&H, and we remain committed to providing outstanding products and services while pursuing growth and innovation in the US, Canada, and Puerto Rico."
Gund's court filing listed the circumstances leading to the commencement of the holding company's Chapter 11 cases.
One is that API has "experienced a significant decline in revenues and increased liquidity constraints as a result of several economic factors and operational challenges, including, among other things, increased market competition, the COVID-19 pandemic, and the Russia-Ukraine war."
There are also "liquidity pressures related to legacy talc liabilities arising out of their former U.S. operations," particularly two negative verdicts.
Another factor is limited insurance coverage, which is due to "insurer insolvencies and certain asbestos coverage exclusions."
The company also "incurred substantial debt to fund operations, pay for talc litigation, and refinance third-party debt that existed at the time of the Natura Acquisition."
API's debt obligation is broken down at:
- approximately $1.271 billion in secured and unsecured debt owed to the Natura Group
- approximately $22.7 million in third-party unsecured bonds
Debt owed by API to Natura are:
- approximately $273.2 million of secured debt incurred by API as a borrower under certain credit facilities
- approximately $530.7 million of secured debt guaranteed by API and certain other Debtors for the benefit of their primary non-Debtor operating subsidiary, Avon Cosmetics Limited
- approximately $467.6 million of unsecured debt in the form of a promissory note issued by API to Natura
API, since early 2023, has been discussing restructuring alternatives to address liquidity and engaged with professionals, including Weil, Gotshal & Manges LLP as counsel in October 2023, Ankura as financial advisor in June 2024, and Rothschild & Co as an investment banker in July 2024.
Discussions with Natura have also culminated in the execution of a settlement agreement.
Filing for bankruptcy is not a death sentence. It remains a critical mechanism for businesses facing financial distress, hoping to get through the slump and bounce back.
UPDATED (August 16, 2024; 10 a.m.): This article has been edited to include Avon Philippines' statement.