Importance of Debt Restructuring

An organization or company experiencing financial distress and liquidity issues may restructure its debt obligations to gain greater flexibility in the short term and make its debt burden more manageable.

FREMONT, CA: Debt restructuring is when a company or entity experiencing financial distress and liquidity issues refinances its existing debt obligations to gain greater short-term flexibility and make its debt burden more manageable.

Why Debt Restructuring Is Done

If a business is contemplating debt restructuring, it likely faces intractable financial issues. In such a situation, the company has few options, such as restructuring its debts or declaring bankruptcy. Restructuring existing debts is preferable and more cost-effective in the long run than declaring bankruptcy.

Methods for Debt Restructuring: Companies can restructure their debt by directly negotiating with their creditors to restructure the terms of their debt payments. If a company cannot make its scheduled debt payments, its creditors may require a debt restructuring. Here are some methods for achieving this:

Swap of debt for equity: Creditors may consent to waive a portion of outstanding debt in exchange for company equity. Typically, this occurs when a company has a significant asset and liability basis, and forcing it into bankruptcy would create little value for its creditors.

It is advantageous to enable the company to continue operating as a going concern and to involve its creditors in its operations. This can result in the original shareholders' stake in the company being significantly diluted or diminished.

Bondholder Haircuts: Companies with outstanding bonds can negotiate with bondholders for "discounted" repayment terms. This can be accomplished by reducing or eliminating principal or interest payments.

Informal Debt Repayment Agreements: Debt-restructuring companies may request lenient repayment terms and even the ability to write off a portion of their debt. This can be accomplished by communicating directly with the creditors and negotiating new repayment terms. This is a more cost-effective option than involving a third-party mediator, and it is achievable if both parties are committed to reaching a workable agreement.

Debt Restructuring vs. Bankruptcy

Typically, debt restructuring requires direct negotiations between a company and its creditors. The reorganization can be initiated by the company or, in certain instances, by its creditors.

On the other hand, bankruptcy is a process that allows a company experiencing financial difficulties to postpone payments to creditors through a legally mandated suspension. After filing for bankruptcy, the company will develop a repayment plan with its creditors and the court.

If the company cannot comply with the terms of the repayment plan, it will be forced to liquidate to repay its creditors. The court then determines the circumstances of repayment.

Debt Restructuring vs. Debt Refinancing

Restructuring debt is distinct from refinancing debt. The former scenario necessitates debt reduction and a repayment plan extension. Debt refinancing, on the other hand, is simply the substitution of an old debt with a new debt, typically with slightly different terms, such as a reduced interest rate.