Debt restructuring is a process wherein a company or an entity experiencing financial distress and liquidity problems refinances its existing debt obligations in order to gain more flexibility in the short term and make their debt load more manageable overall.
Reason for Debt Restructuring
A borrower for example, a company that is considering debt restructuring is likely experiencing financial difficulties that cannot be easily resolved. Under such circumstances, the company faces limited options – such as restructuring its debts or filing for bankruptcy. Restructuring existing debts is obviously preferable and more cost-effective in the long term, as opposed to filing for bankruptcy.
How to Achieve Debt Restructuring
Companies can achieve debt restructuring by entering into direct negotiations with creditors to reorganize the terms of their debt payments. Debt restructuring is sometimes imposed upon a company by its creditors if it cannot make its scheduled debt payments.
Here are some ways that it can be achieved:
- Debt for Equity Swap
Creditors may agree to forgo a certain amount of outstanding debt in exchange for equity in the company. This usually happens in the case of companies with a large base of assets and liabilities, where forcing the company into bankruptcy would create little value for the creditors.
It is deemed beneficial to let the company continue to operate as a going concern and allow the creditors to be involved in its operations. This can mean that the original shareholder base will have a significantly diluted or diminished stake in the company.
- Bondholder Haircuts
Companies with outstanding bonds can negotiate with its bondholders to offer repayment at a “discounted” level. This can be achieved by reducing or omitting interest or principal payments.
- Informal Debt Repayment Agreements
Companies that are restructuring debt can ask for lenient repayment terms and even ask to be allowed to write off some portions of their debt. This can be done by reaching out to the creditors directly and negotiating new terms of repayment. This is a more affordable method than involving a third-party mediator and can be achieved if both parties involved are keen to reach a feasible agreement.