Debt restructuring

From Wikipedia, the free encyclopedia

Debt restructuring is a process that allows a private or public company - or a sovereign entity - facing cash flow problems and financial distress, to reduce and renegotiate its deliquent debts in order to improve or restore liquidity and rehabilitate so that it can continue its operations.

Out-of court restructurings, also known as workouts, are increasingly becoming a global reality. A debt restructuring is usually less expensive and a preferrable alternative to bankruptcy. The main costs associated with a business debt restructuring are the time and effort to negotiate with bankers, creditors, vendors and tax authorities. Debt restructurings typically involve a reduction of debt and an extension of payment terms.

Small business bankruptcy filings cost at least $50,000 in legal and court fees, and filing costs in excess of $100,000 are common. By some measures, only 20% of firms survive Chapter 11 bankruptcy filings.^[1]

[edit] Outside Help From Insolvency and Restructuring Experts

Most of the very large and complex corporate restructuring cases are handled by leading management consulting firms which have experienced turnaround and restructuring practices. Small business cases are typically handled by smaller restructuring firms. Experience shows that when companies outsource restructuring work to experienced and reputable outside professionals, typical results and savings from restructurings can be significantly greater than those achieved on their own.

[edit] Debt-for-Equity Swaps

In a debt-for-equity swap, a company's creditors generally agree to cancel some or all of the debt in exchange for equity in the company.

Debt for equity deals often occur when large companies run into serious financial trouble, and often result in these companies being taken over by their principal creditors. This is because both the debt and the remaining assets in these companies are so large that there is no advantage for the creditors to drive the company into bankruptcy. Instead the creditors prefer to take control of the business as a going concern.

As a consequence, the original shareholders' stake in the company is generally significantly diluted in these deals.