11 Mar 2022 Ankit Chadha

Understanding Corporate Debt Restructuring: A Brief Guide

Debt Restructuring | TRC Consulting

In case you are wondering what is debt restructuring, then we can help you out. To put it in simple words, corporate debt restructuring, or debt restructuring is the restructuring or reshuffling of a distressed company's outstanding obligations to re-establish its liquidity and keep it in business. It is often achieved by way of co-operation between distressed companies and their creditors, such as banks and other financial institutions, by cutting short or decreasing the whole amount of debt the company has to pay, and also by reducing the interest rate it pays while increasing the time it has to pay the debt back.

Occasionally, some of a company's debt may be let off by creditors in return for an equity standing in the company. Such provisions, which often are the ultimate opportunity for a troubled company, are preferable to a more complex and costly bankruptcy.

What Is Debt Restructuring and Its Significance?

The need for corporate debt restructuring or debt restructuring often arises when a company is going through a tough time financially. When we say tough time financially, we mean they are having trouble in meeting their obligations, such as debt payments. Basically, when a company owes more debt (and debt payments) than the revenue it generates.

However, if the difficulties are plenty to pose a substantial risk of the company going bankrupt, it can reach a deal with its creditors to decrease these burdens and increase its chances of avoiding bankruptcy.

Techniques Of Corporate Debt Restructuring

One of the best techniques of corporate debt restructuring for companies would be to negotiate with their creditors. The company can request its creditor to reorganize the terms of its debt payments. Debt restructuring is often imposed upon a company by its creditors if there are faulty payments or the company is unable to make its scheduled debt payments. Here are three techniques of corporate debt restructuring that can be used:

  1. Debt for Equity Swap

Creditors may decide to waive a certain amount of outstanding debt in exchange for equity in the company. This usually occurs in the case of companies with a large base of assets and liabilities, where pushing the company into bankruptcy would create little value for the creditors.

It is considered advantageous to let the company continue to operate and let the creditors be involved in its operations and management. This can mean that the initial shareholder base will have a significantly reduced or diminished stake in the company.

  1. Bondholder Haircuts

Companies with outstanding bonds can settle with their bondholders to repay at a "discounted" level. This can be accomplished by decreasing or omitting interest or principal payments.

  1. Informal Debt Repayment Agreements

Companies restructuring debt can ask for relaxed repayment terms and even ask to write off some segments of their debt. This can be done by reaching out to the creditors directly and negotiating new repayment terms. Moreover, this is a more inexpensive and reasonable method than involving a third-party mediator and can be accomplished if both parties concerned are keen to reach a viable agreement.

Debt Restructuring vs Bankruptcy

Debt restructuring normally includes direct discussions between a company and its creditors. The restructuring can be commenced by the company or, in some cases, be imposed by its creditors.

On the other hand, bankruptcy is basically a process through which a company facing financial difficulty can postpone payments to creditors through a legally enforced pause. After declaring bankruptcy, the company in question will work with its creditors and the court to develop a repayment plan.

In case the company is not able to honour the terms of the repayment plan, it must announce itself insolvent in order to repay its creditors. The repayment conditions are then decided by the court.

What Are the Benefits of Debt Restructuring?

Debt restructuring can provide you with many benefits for your organization, but most crucially, it helps you put emphasis on making your business survive and sustain. To help you get a better idea about it, here are some of its benefits:

Free up your cash: Postponement and /or reduction in instalments/ interest rate free up the urgent cash and avoid discrepancies.

Reduced interest rates: Existing loans may be at a higher interest rate because your firm urgently requires funds. Therefore, opting for debt restructuring can save your firm from over-the-top interest rates. Thus, you can keep the money for your future plans. There is also a chance that the lenders may agree to a lower interest rate at the outset and get reimbursed with a higher interest rate at a later date to avoid any instant cash flow discrepancies.

Make your finances more organized: If you have taken several loans for your business, then debt consolidation will help you plan your finances more consciously. You can make better decisions by transforming these loans into in single loan with a restructured repayment schedule to match the current and projected cash flows.

TRC's Restructuring Services

TRC Corporate Consulting's restructuring services bring ground-breaking solutions to organizations at a connection between growth prospects and challenges that may severely affect them.  There are external factors such as an alteration in market structure and rules or internal factors such as unsuitable balance sheet structure and alteration of proprietorship. All these factors put the organizations and their stakeholders under stress.

Our restructuring teams, including the corporate debt restructuring teams, promptly recognize the root triggers, risk, and strategic prospects. We support and assist the boards in choosing the right procedures that allow considerable value creation and help achieve constancy in operational and financial functions. Our execution teams work in close co-operation and partnership with the client, across various service lines to guarantee that the organization's evolution towards sustainable and profitable growth gets accomplished swiftly.

TRC Corporate Consulting offers market-leading advisory and support services that concentrate on strengthening recoveries, increasing financial performance, and undertaking the core structural and funding issues of an organization. 

Contact our team for any inquiry or further knowledge about any of our services!

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