Corporate Debt Restructuring: A Brief Guide

Roshni Khatri

17th Sep'22

Unemployment rates are higher than ever both during and after the Covid-19 outbreak. This indeed created a great impact on businesses. With businesses heading straight to financial crisis and in future resulting in the case of bankruptcy. 

Furthermore, according to economic norms, we might anticipate a double of bankruptcies. So, restructuring your debt is a key strategy for dealing with insolvent and fiscal crises. Additionally, economic hardship may not always lead to bankruptcy. 

Therefore corporate debt restructuring is frequently a quick and affordable option to get back on your feet, so it appeals to many whether you use it in place of bankruptcy or after it.

This guide describes what debt restructuring is specifically, how it works, and what is the process of it. So let’s start!

 

What is Corporate Debt Restructuring?

Well, before I get into the specifics of debt restructuring, you should know that there are a variety of forms it can take. Restructuring a bank loan may occasionally be necessary, just as it is essential to restructure credit card debt in some cases. In general, restructuring corporate debt enables a firm or sovereign organization to confront insolvency or cash flow issues by altering the terms of its loans. 

 

Corporate Debt Restructuring

 

Thus debt restructuring is the procedure used when a firm decides to reorganize its debts in accordance with its creditors. However there are also regulatory procedures that may be used but debt restructuring is often carried out through a contract between the company and its creditors. Implementing cost-cutting initiatives and refinancing a company's current debts are common components of business restructurings. 

 

Motive 

The intention of doing this is to restore liquidity and enable business activities. This could entail raising interest rates, extending the repayment period, or converting the debt into equity shares. 

Restructuring debt costs approximately less than filing for bankruptcy. The time and energy invested in negotiating with creditors account for a large portion of the costs associated with filing for insolvency. 

Besides this, closing unsuccessful firms and selling particular assets are two examples of these cost-cutting techniques. 

 

When Does a Company Go Through Debt Restructuring?

Conventional representations and warranties about a company's financial situation are included in loan agreements. These include claims that the borrower is not experiencing financial hardship and that there has been no violation of any existing contracts or financing papers. 

Financial covenants in loan agreements specify the guidelines such as financial ratios that a borrower must follow throughout the loan's tenure. If a company is financially sound, a lender will expect it to operate within certain parameters defined by these ratios. These covenants will be used by the lender to keep an eye on the borrower's finances and look for any signs of trouble.

If a financial covenant is broken, the borrower must notify its lenders, who then have the right to have some control over the company. With this, if a borrower violates a financial covenant, then the lender is allowed to accelerate the loan and revoke any future borrowing privileges. 

Hence a debt restructuring may be prompted by the violation of a financial covenant, which is an event of default. So a financial covenant violation, which is a default event, may lead to debt restructuring. 

 

Corporate Debt Restructuring

 

Why Do Creditors Want Debt Restructuring?

Several lenders would understand that restructuring rather than formal insolvency procedures will yield better returns on their investment for businesses experiencing temporary financial difficulties. Here some prime elements of why we should opt the debt restructuring process are described.

Once a business is in financial problems, its lenders will have a lot of influence over it. Lenders occasionally make threats to foreclose on further loans and accelerate their loans. 

If a business wants to keep operating, it will wish to avoid this. However, a lender could wish to stop bringing about formal insolvency because this will lead to defaults in the company's other debts and may ultimately make it less likely that a creditor will be paid back.

If the corporation is allowed enough latitude in the terms of repayment, restructuring may be alluring to lenders since they have a chance of receiving a complete repayment. 

However, lenders will want to show that a corporation has intrinsic value, that the business model is sound, and that the restructuring has the support of the company's major creditors.

 

Process of Corporate Restructuring

Although there are several methods and proceeding for debt restructuring still here some prime steps of it are described:

  • Build a steering group.

  • Agree on a standstill

  • Construct a reorganizational agreement 

The principal creditors usually form a committee of significant creditors to make critical decisions on the restructuring. The committee will generally act as a liaison between the borrower and the creditors. With this, the committee will likely also appoint lawyers and accountants to conduct an investigation.

The standstill agreement forbids the beginning of insolvency procedures, the enforcement of security interests, or the acceleration or termination of loans. All debts are frozen, and lenders aren't allowed to take any steps to strengthen their positions. 

The restructuring agreement specifies the postponement or rescheduling of debt payments, extends maturity dates, and may increase the loan's worth by including accrued interest (a capitalization of interest). 

Moreover, a debt-for-equity swap, in which the lenders convert their debt into equity in the borrowing company, may also be a part of a restructuring deal. With this, you should also know about personal wealth management as it can help you to fulfill your financial goals. 

 

Corporate Debt Restructuring

 

Conclusion

Change is the most significant part of our life so as for businesses. So the way you manage change determines whether the change is successful or unsuccessful. With this, the only way to protect your company from failure during a restructure is by using a risk-based strategy. 

Thus the reorganization aims to maximize the company's value by avoiding the need for official insolvency procedures. 

For more articles under financial categories, stay tuned with us!
 

We, at OpenGrowth, are committed to keeping you updated with the best content on the latest trendy topics from any major field. Also, both your feedback and suggestions are valuable to us. So, do share them in the comment section below.

A keen observer, who loves to spend time with nature. A fun loving person, enjoys to explore the new aspects of life. Passionate about reading and learning new things. Roshni is dedicated towards her work and has worked in different professions.

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