Debt Restructuring: What alternatives are available?
The majority of debt restructurings involve people who are (or who suddenly become) too reliant and in a position to pay the current debt burden. If borrowers and lenders can agree on a restructuring program could, in many instances, prevent the value from being lost through a formal bankruptcy process as well as ensure that a sustainable business can continue to meet with the obligations of its debt.
There are benefits and negatives to consensual restructurings, and the correct method of proceeding will depend on the specific situation of the borrower in financial distress as well as its creditors. It is essential to take care regardless of whether or not there is any default on loan to ensure that the relevant insolvency laws are adhered to and (where applicable) directors of the company are aware of their obligations towards the company and the creditors in general.
Key stages
The most critical phases of a debt restructuring generally:
stabilizing the borrower by making sure that an agreement to standstill binds its creditors
Preparing valuations and the data necessary to demonstrate how the restructuring can produce the possibility of a viable loan - this typically involves due diligence and business plans, forecasts, etc. Additionally,
Implementing and signing the signing and implementing the (the structure of which will be determined by the kind of restructuring that will be implemented).
Standstill agreements
Simply put, a standstill agreement is a contract between the borrower and its lenders stopping enforcement by the creditor.
Suppose restructuring is thought to be an option that is feasible to move forward by the parties involved in the case of a borrower (rather than believing that formal bankruptcy proceedings are the only option). In that case, They will wish to see that all involved parties sign an agreement that stops the borrowing process to allow the borrower some time to create a restructuring plan.
The standstill agreement should reflect the underlying financial documents and outline the actions required to ensure the enforcement at a standstill. It will likely contain any necessary consents to the halt and any formal waivers of any breaches or instances that resulted in a default on the part of the lender. Creditors could require additional fees or security or guarantees in exchange for signing a consent to abstain from enforcement actions in the standstill agreement.
Valuations
The determination of the place where the value lies in the borrower's business will decide the form of any restructuring plan. It will establish the strengths and weaknesses of all parties in the negotiation table. The updated forecasts and business plans must show an acceptable amount in return for equity and debt providers, challenging to attain.
Diverse parties may commission their valuations, which could lead to divergent ideas on how to structure the debt and the borrower's business. It will help save time and be more efficient when all the parties reach an agreed-upon valuation method from the beginning when possible.
Options for restructuring
Restructuring debt usually involves one or one or:
an agreement to waive and set
a new debt injection
New lenders do a refinancing
a sale/breakup of non-core assets
a recent equity injection/recapitalization
A debt-for-equity swap and
exchange to a Newco
Preservation of equity
Equity holders who are already in the market generally prefer restructuring in the shape of covenant waiver/reset or the rescheduling of debt instead of an example of an equity swap in exchange for debt which could cause their equity to be reduced or completely wiped out.
Which of these strategies is acceptable to lenders will naturally depend on the particular circumstances. For them to be viable, lenders must be aware that the borrower's situation is only temporary, and they must be willing for the possibility of rescheduling their repayment or absolving a portion or all of their debts, the probability of being paid back increases.
A debt rescheduling or covenant waiver can also benefit from not causing the debt to be accelerated or crossed-defaulted in any other finance agreement that the borrower could have. They can be accomplished relatively inexpensively and discreetly.
Covenant waiver
One of the first signs of trouble is usually a type of covenant violation by the lender. The debtors may be willing to accept a basic waiver to repair an insignificant lapse in the borrower's financial performance or perhaps to purchase some time before a comprehensive restructuring is completed.
Debt rescheduling
Sometimes, the parties can agree that the debt could be rescheduled. This could be accomplished by altering the repayment plan for the loan (i.e. by granting the vacation for capital payments, cutting or changing the number of repayment instalments, or extending the date for the loan's maturity).
New debt
It could be possible to convince a sympathetic lender to extend new funds to a borrower or reduce some of its current credit or accrued interest if a clearly defined plan and convincing arguments support the request. A borrower might get, for instance, granted a bridging loan to allow it (and its shareholders) time to consider the feasibility of the venture or arrange for a second equity investment.
Refinancing using new lenders
If the lender that is currently in place is not interested (or is seeking to structure in a way that existing stakeholders are not happy with) it could be possible to convince a different lender to assist in restructuring plans for the company. The lender in question would have to accept a suspension of operations until they get the funds being arranged and are likely to repay the loan in full (including the early redemption fee).
Equity Dilution
Other options for restructuring include making changes that lower the ratio of equity and debt of the borrower to put it in a better position to fulfil its financial obligations moving forward.
These alternatives are generally more attractive to lenders because an increase in equity generally provides better protection for a business's debt and may provide lenders with greater "reward" to compensate for the higher "risk" associated with lending to a borrower who is (at least temporarily) in a state of distress.
Sale or breakup of non-core assets
A borrower might ease its situation by selling off assets that aren't core or portions of the business and using the proceeds to repay their credit card (leaving the equity as it is). A secured lender must consent to any breakup plan and be sure that (1) what is earned through the sale is appropriate, as well as (2) the remaining portion of the business will produce enough profits to pay back the debt.
Equity investors will keep their part of a smaller borrower. However, the borrower's debt-to-equity ratio with a smaller amount is likely to have changed due to.
New equity injection/Recapitalization
The first step for many borrowers in financial difficulties is likely to consider raising additional equity to finance the business in the event of a slump. This could be a viable option when it is thought that the company is possible, but it is suffering from a lack of trading opportunities and a constrained cash flow. Every equity holder who does not take part in the new round is at risk of being reduced in value because of it.
The term "recapitalization" refers to a business altering the ratios of its equity and debt or the composition of the structure of its capital shares. This is possible through a variety of methods. This might be attractive for a distressed borrower looking to make its debt load more manageable to increase equity or to consider the risk levels associated with different kinds of equity.
Debt-for-Equity swap
In a debt-for-equity swap, financial creditors get shares of the borrower that has been restructured in exchange for the reduction or cancellation of the debts they have. The debt-for-equity trade decreases the debtor's liabilities on their balance sheet. It may allow lenders to gain a portion of the gains after the borrower is restructured and earns a profit - by way of dividends or in case of a subsequent sale or the need to exit. Existing equity holders will naturally be diminished due to the swap.
Comments
Post a Comment