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What is Debt Restructuring and its Benefits?



Debt restructuring is the process of realigning a company's existing debts in order to increase liquidity. Businesses, individuals, and even countries use it to reduce debt obligations and to realign the capital structure. 

With debt restructuring, a company restructures its debt terms to renegotiate with its creditors, such as lowering interest rates or extending repayment terms or a change in security package. It can be used to reduce or eliminate the interest rate on existing debt or refinance existing debt. For a debt restructuring to work effectively it should be accompanied by either an equity injection and/or a disposal of non core assets

Reason for Debt Restructuring

Primarily a company considers debt restructuring while experiencing liquidity problems that are difficult to resolve. In such cases, the company has few options to restructure its debts or declare itself bankrupt. Most companies prefer restructuring their debts, which is more cost-effective in the long run provided the business remains solvent.

Modalities of Debt Restructuring

  • Below we have mentioned various ways to restructure debts.
  • Lower the interest rate
  • Extension on the payment date
  • Changes in sanctions such as margin
  • Debt to equity or similar instruments conversion
  • Combination of any two or more
  • Restructuring the repayment schedule within the original repayment schedule

Debt Restructuring Methods

1. Debt to Equity Swap

Lenders may forego outstanding debt in exchange for a stake in the company in a debt-to-equity swap. It is typically used when the company has a large asset base and balance sheet, and bankruptcy will provide little value to the lenders or the business prospects willprovide a better return to equity holders than debt holders.

2. Bondholder Haircut

A defaulting company with outstanding bonds may negotiate with bondholders and offer payments at a reduced price, omitting or reducing interest or principal payments.

3. Negotiating Repayment Terms

Companies that are restructuring their debt can request lenient repayment terms and even ask that some of their debt be written off, which can be accomplished by contacting creditors directly and negotiating new repayment terms. A waiver of debt usually works if it applies to all creditors

Benefits of Debt Restructuring

1. Realigning Existing Debts

Making multiple monthly payments can be time-consuming. By consolidating these debts, you can combine your monthly payments into a single payment in line with the forecasted cash generation. It's simple to keep track of, and you can concentrate on other essential aspects of your business.

2. Enables Financial Planning

When multiple repayments are made at different interest rates, it is challenging to plan a company's finances. Debt restructuring enables you to develop effective financial strategies for business expansion through a debt consolidation.

3. Lower Interest Rates

The interest rates on the loans you're currently repaying may put a financial strain on your company. Consolidating your company's existing debts may result in a lower interest rate, reducing your company's cost of finance from outstanding loans.

4. Free Up Cash

The outstanding debts you're repaying each month may consume a significant portion of the cash in your business which might strain your working capital availability and leave you unable to carry out your growth plans. Restructuring these debts can result in lower monthly payments, freeing up cash for business operations and allowing you to grow.

For debt restructuring services, consider KICK Advisory Services. They offer the best bespoke debt restructuring solutions.

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