Debt Restructuring

Posted in Finance, Accounting and Economics Terms, Total Reads: 1438

Definition: Debt Restructuring

Debt Restructuring is a mechanism by which a company can reorganize its outstanding obligations by negotiating the terms with the primary lenders for increased continuity of its operations. This can be done using the following ways:

1) Increasing the loan tenure

2) Reduction of interest rate

3) Converting debt into equity

4) One time settlement

5)  Conversion of subserviced portion of interest into term loan

It is an easy and cheap way of avoiding bankruptcy only involving the negotiation with lenders as the main reason of incurring money and time. Debt restructuring reduces the debt obligations and increases the time of repayment. Also liquidating the assets is a cumbersome process in terms of the legal proceedings and yields low returns to the creditors and hence motivates the lenders to go for the debt restructuring because the primary interest of lenders lies in recovering the principal amount and returns on this investment and not in the liquidation of assets.

Debt restructuring minimizes the creditors’ losses and also losses incurred by the stakeholders and help the company in recovering economically. Advantages of debt restructuring are:

1)      It is unlikely that the termination rights which are found in the company’s contracts will be exercised.

2)      Huge costs behind court processes, restructuring of the organization etc. can be avoided.

3)      Management of the company usually provide a guarantee to the creditors and hence are better off this way

Hence, this concludes the definition of Debt Restructuring along with its overview.

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