How Debt Restructuring Work?
When a company or an entity faces financial hardship and cash flow issues, it may opt for debt restructuring. This is a way of renegotiating the terms and conditions of its existing debt obligations to get more breathing room in the short term and reduce its debt burden in the long term.
The Purpose of Debt Restructuring
A company that opts for debt restructuring is probably facing financial challenges that are hard to overcome. In such a situation, the company has few choices – such as renegotiating its debts or declaring bankruptcy. Restructuring existing debts is clearly more desirable and less expensive in the long run, than filing for bankruptcy.
1.How to Negotiate with Creditors
Debt restructuring is a process of changing the conditions of debt repayment to make it more manageable for the debtor. It can be done voluntarily by the debtor and the creditor, or it can be forced by the creditor if the debtor defaults on the debt. Some of the methods of debt restructuring are:
Debt for Equity Swap: How Creditors Can Become Shareholders Debt for equity swap is a method of debt restructuring where creditors agree to cancel some or all of the debt owed by the company in return for a share of ownership in the company. This is often used for companies that have a lot of assets and liabilities, and would not generate much value for the creditors if they went bankrupt.
By letting the company survive and participate in its management: The creditors hope to gain from the future profits of the company. However, this also means that the original shareholders will lose some or all of their stake in the company.
2.How Companies Can Pay Less Than They Owe
Bondholder haircuts are a way of debt restructuring where companies with outstanding bonds can offer to pay back their bondholders at a lower amount than the original debt. This can be done by cutting or skipping interest or principal payments.
3. How Companies Can Settle Their Debt Amicably
Informal debt repayment agreements are a way of debt restructuring where companies that are facing debt problems can request for more flexible repayment conditions and even ask for some of their debt to be forgiven. This can be done by contacting the creditors personally and discussing new repayment plans. This is a cheaper method than hiring a third-party facilitator and can be successful if both parties involved are willing to reach a reasonable agreement.
Differences between Debt Restructuring and Refinancing: How Companies Can Deal with Their Debt Problems
Debt restructuring is a way of changing the terms of debt repayment between a company and its creditors. The restructuring can be done voluntarily by the company or, in some situations, be imposed by its creditors.
On the contrary, bankruptcy is a legal procedure that allows a company that is struggling financially to postpone payments to creditors with a court order. After filing for bankruptcy, the company will cooperate with its creditors and the court to devise a repayment plan.
If the company fails to comply with the terms of the repayment plan, it has to sell its assets to pay back its creditors. The repayment terms are then determined by the court.
Inconclusion
Debt Refinancing and Debt Restructuring are not the same. The former involves debt forgiveness and a longer repayment period. The latter is simply the substitution of an old debt with a new debt, often with slightly better terms, such as a lower interest rate.
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