Debt Restructuring Meaning?

Refinancing is a procedure where a company with cash flow issues has an agreement with lenders to negotiate an acceptable or flexible agreement and avoid bankruptcy. The lenders could opt to lower the company's interest rate or extend the amount of time required to pay the principal and interest.

Debt Restructuring Methods


1 - Debt for Equity Swap


In the event of swaps of equity and debt


The lenders can decide to pay off the debt to acquire an equity stake in the company. This is typically done in situations where the business has a substantial portfolio of assets, and the balance sheet is significant—balance sheet.And bankruptcy can create very little worth for the lenders.


Therefore, the lenders assume control of the business and attempt to run the company as a go-to business. The lenders purchase a large equity stake, thus reducing the stakes of the original shareholders, who could have an encroaching stake in the business.

 2 - Negotiating Repayment Terms


A business can agree to terms for repayment that include reduction of interest or writing off outstanding loans and increasing the time until repay. This is a less costly option and is possible through an agreement between companies and lenders.


Advantages


  • Legal protection of the company from lenders

  • The protection of assets of the company

  • The company will be protected from shutting down and operating as a continuing concern.

  • Employment opportunities of employees are protected.

  • Creditors can get a better recovery than bankruptcy.


Disadvantages


  • Reduce recovery through lowering interest rates and increasing frequency of payments

  • Write-offs

  • It could impact your balance sheets of creditors.

  • Even after restructuring debt, there is no guarantee that the business will run without a hitch and keep up with timely payments.


The most important points about debt restructuring


  • Debt restructuring is a method to reduce the obligation of the company in the event of financial difficulty.

  • It could compromise a debt-for-equity swap or an extended time of insufficient payments and reducing the interest rate.

  • Although it might help the company avoid bankruptcy in the short run, there is no guarantee it will continue to run well after the debt restructuring.


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