Debt Restructuring

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Debt Restructuring

What is Debt Restructuring? Meaning.

Debt Restructuring is a court ordered or mutual agreement, used by organizations (facing Cash Flow problems or other financial trouble) to reduce the amount of debt obligations and/or renegotiate the terms of debt agreements in order to achieve certain advantages, which typically include improving or restoring Liquidity or to prevent foreclosure and liquidation, and to continue operations. Is a major part of Recapitalization.

Why Debt Restructuring? Reasons

Instead of forcing an organization into bankruptcy, lenders frequently agree to restructure the loan obligations of distressed debtors, allowing them to remain in business.

Lenders are generally willing to restructure a debtor's loan to help the organization resolve the present financial difficulties and stay in business, as they often receive more through a restructuring than through foreclosure or bankruptcy. The distress Liquidation Value of any firm is generally relatively low.

Corporate debt restructuring can be a way to move a relatively healthy company forward and help to remove some of its burden of the past. A corporate restructuring can give a company a new life and may provide it with the cash flow it needs for a meaningful business restructuring.

Restructured Loans

A restructured loan can differ from the original loan agreement in several ways, for example:

  • Scheduled interest and principal payments may be reduced or eliminated (Debt Forgiveness).
  • The debtor and lender can settle the loan for cash, other assets, or equity interests (Debt Conversion).
  • The repayment schedule may be extended over a longer time period (Debt Rescheduling).

Debt Restructuring Categories

Examples of debts categories which can be restructured are:

  • Machinery
  • Equipment rentals/leases
  • Business loans or mortgage on business property
  • Capital payments due for improvements/construction
  • Lawsuits and judgments
  • Invoices and statements
  • Disputed bills
  • Problem debts

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Compare with: Financial Covenants  |  Recapitalization  |  Off-Balance Sheet Financing  |  Contingent Liabilities  |  Z-Score  |  Liquidation Value

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