Financial Restructuring: Everything You Need To Know

Financial restructuring can be done out of need or as part of the company's financial plan.

Fremont, CA: Financial restructuring is the technique of rearranging or reorganizing a company's financial structure, consisting mostly of stock and debt capital. Financial restructuring can be done out of need or as part of the company's financial plan. This economic restructuring can occur on either the assets or liabilities side of the balance sheet. If one is modified, the other will get updated proportionately.

Debt Restructuring

Debt restructuring is the technique of reforming a company's whole debt capital. It entails rearranging the balance sheet entries, which comprise the company's debt commitments. Compared to equity restructuring, debt restructuring is more routinely employed as a financial instrument. This is because a business's finance management must continuously consider measures to reduce the cost of capital while enhancing overall company efficiency, which will need a regular evaluation of the debt portion and recycling it to optimum efficiency.

Debt restructuring might get done depending on the conditions of the company. These can get roughly classified into three types.

• A healthy corporation can engage in debt restructuring to modify its debt component by taking advantage of market possibilities by replacing existing high-cost debt with low-cost borrowings.

• A corporation experiencing liquidity issues or poor debt servicing capacity might consider debt restructuring to lower borrowing costs and enhance working capital.

• A corporation that cannot meet its current financial commitments with the resources and assets at its disposal might also seek restructuring.

Equity Restructuring

The process of reforming equity capital is known as equity restructuring. It comprises the reshuffling of shareholders' money as well as the reserves shown on the balance sheet. Restructuring stock and preference capital become a complex legal process that is carefully regulated. The notion of capital reduction is central to equity restructuring.

• Restructuring of long-term secured borrowings:

Secured long-term borrowings will get restructured for a variety of reasons, including lowering the cost of capital for healthy firms, boosting liquidity and increasing cash flows for a sick company, and enabling rehabilitation for just that sick company.

• Restructuring of long-term unsecured debt:

Depending on the nature of the loan, long-term unsecured borrowings will get restructured. These borrowings can take the form of public deposits, unsecured private loans, and privately issued, unsecured bonds or debentures. Public deposit terms can be negotiated only if the appropriate authorities approve the plan.