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Corporate debt restructuring is the process by which a financially troubled company agrees with its creditors to restructure its debt obligations.
The restructuring is intended to avoid the need for formal insolvency procedures while maximising the value of the company that remains. But what exactly is the procedure? And what steps do you need to take to make the most of it?
What is Corporate Debt Restructuring?
A corporate debt restructuring is the process by which a company agrees to restructure its debts with its creditors. Debt restructuring is typically implemented through a contract between the company and its creditors, though statutory procedures may also be used.
Many corporate restructurings involve the implementation of cost-cutting measures as well as the refinancing of a company’s existing debts. These cost-cutting measures may include the closure of unprofitable businesses and the sale of specific assets.
A corporate debt restructuring provides a company with the opportunity to avoid insolvency and continue operations. A corporate restructuring provides a lender with the opportunity to maximise their return on investment.
Why would a company consider debt restructuring?
Financial covenants that a company has with its lenders will typically include:
Cashflow cover: Whether a company has enough cash flow to service its debts.
Interest cover ratios: Whether a company’s profits are sufficient to cover interest payments.
Leverage ratios: Borrowing to operating cash flow as well as earnings before interest, tax, depreciation, and amortisation of a company (EBITDA).
Net Worth: A minimum amount of tangible asset value.
Working capital assessments: The current asset to current liability ratio.
A breach of a financial covenant demands a borrower to notify its lenders, and the lenders will have some control over the business. If a borrower violates a financial covenant, the lender may accelerate the loan and cancel any future borrowing rights. A breach of a financial covenant is a default event that may require debt restructuring.
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Why would a creditor want a debt restructuring?
Many lenders will recognise that for businesses experiencing temporary financial difficulties, restructuring will provide a better return on investment than formal insolvency procedures. Once a company is in financial trouble, its lenders will have a lot of power over it.
A lender may threaten to accelerate its loan and thereby restrict access to additional funds. If a company wants to stay in business, it will want to avoid this. A lender, on the other hand, may wish to avoid triggering formal insolvency, as this will result in defaults on the company’s other obligations, possibly reducing a creditor’s chances of being repaid.
If the company is given enough flexibility over repayment terms, a restructuring can be appealing to lenders because they stand a chance of being repaid in full. Formal insolvency procedures, on the other hand, crystallise losses and can prevent a business from generating revenue.
Lenders, on the other hand, will want to see evidence that a business has inherent value, that the company’s business model is sound, and that the restructuring does have the support of the company’s principal creditors.
What is the corporate debt restructuring process?
There are typically three steps in a restructuring with significant bank or bondholder debt:
- Form a steering committee.
- Negotiate a standstill agreement.
- Negotiate a restructuring agreement.
The main creditors will usually form a committee of key creditors to make major restructuring decisions. The committee will serve as an intermediary between the borrower and the creditors. The committee will almost certainly appoint investigatory accountants and legal counsel.
The standstill agreement forbids loan acceleration or termination, security enforcement, or the initiation of insolvency proceedings. All debts are frozen, and lenders are barred from taking actions to improve their individual positions.
The restructuring agreement specifies the deferment or rescheduling of debt repayments, the extension of maturity dates, and the addition of outstanding interest payments to the debt’s value (a capitalisation of interest). A debt for equity swap, in which lenders convert their debt into equity in the borrowing company, may also be included in a restructuring agreement.
What are the important terms of a restructuring agreement?
The following are the key terms of a restructuring agreement:
- Cash conservation measures
- Cash generation
- Financial covenants
- Pricing and fees
- New money
- Security
Lenders will want to limit what a borrower can do with its cash, possibly prohibiting dividend payments, capital expenditure, acquisitions, or further borrowing. They will also want to see that cash is generated from the borrower’s non-core assets.
Financial covenants will establish a minimum level below which a lender will no longer support a borrower. This could be a financial goal that a borrower must achieve or a set of ratios that a borrower must meet.
Financial covenants will be used to assess a borrower’s capital adequacy, liquidity, and solvency. The lenders must agree on whether their fees will be paid up front or at the end of the loan. Interest rates are frequently harmonised, so that the maximum rate of interest becomes the standard interest rate for all loans.
As part of the restructuring, a borrower may wish to obtain new funding. The restructuring agreement will address how the company will obtain new funding. Senior lenders may wish to terminate their relationship with the company as well as sell their debt on secondary markets at this point.
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About Sapient Services
The demand for Corporate debt restructuring is increasing in our country due to an unstable business environment. More and more corporates and SMEs are realising the importance of restructuring in order to run their businesses successfully.
Sapient Services has a team of experts with extensive experience in this field. They dedicate their services to the desired clients with the sole goal of bringing the maximum negotiated advantage to them so that business runs smoothly after the CDR is approved.
Sapient is an independent network of Chartered Engineers/Valuers that provides plant and machinery, land, and building certification/valuation services. Consulting Services. We provide consulting services in the areas of TEV studies, due diligence, compliance consulting, acquisitions and mergers advisory, and other financial and business-related issues.
We provide corporations and individuals with a wide range of valuation and consulting services. For the reporting and recognition of assets and liabilities in financial statements. For Insurance Claims Management, Our insurance advisors use their knowledge of insurance policies and companies to evaluate, recommend, and sell plans based on our customers’ or businesses’ needs.
