MODULE 4A

DEBT RESTRUCTURING
Debt restructuring is a process wherein a company or
an entity experiencing financial distress
and liquidity problems refinances its existing debt
obligations in order to gain more flexibility in the
short term and make their debt load more
manageable overall.
 
Reason for Debt Restructuring

A company that is considering debt restructuring is

likely experiencing financial difficulties that cannot be
easily resolved. Under such circumstances, the
company faces limited options – such as restructuring
its debts or filing for bankruptcy. Restructuring
existing debts is obviously preferable and more cost-
effective in the long term, as opposed to filing for
bankruptcy.
 
How to Achieve Debt Restructuring
Companies can achieve debt restructuring by entering
into direct negotiations with creditors to reorganize
the terms of their debt payments. Debt restructuring is
sometimes imposed upon a company by its creditors if
it cannot make its scheduled debt payments. Here are
some ways that it can be achieved:
 
1. Debt for Equity Swap
Creditors may agree to forgo a certain amount of
outstanding debt in exchange for equity in the
company. This usually happens in the case of
companies with a large base of assets and liabilities,
where forcing the company into bankruptcy would
create little value for the creditors.
It is deemed beneficial to let the company continue to
operate as a going concern and allow the creditors to
be involved in its operations. This can mean that the
original shareholder base will have a significantly
diluted or diminished stake in the company.
 
 2. Bondholder Haircuts
Companies with outstanding bonds can negotiate with
its bondholders to offer repayment at a “discounted”
level. This can be achieved by reducing or omitting
interest or principal payments.
3. Informal Debt Repayment Agreements
Companies that are restructuring debt can ask for lenient
repayment terms and even ask to be allowed to write off
some portions of their debt. This can be done by reaching
out to the creditors directly and negotiating new terms of
repayment. This is a more affordable method than
involving a third-party mediator and can be achieved if
both parties involved are keen to reach a feasible
agreement.
Debt Restructuring vs. Bankruptcy
Debt restructuring usually involves direct negotiations
between a company and its creditors. The restructuring
can be initiated by the company or, in some cases, be
enforced by its creditors.

On the other hand, bankruptcy is essentially a process

through which a company that is facing financial
difficulty is able to defer payments to creditors through a
legally enforced pause. After declaring bankruptcy, the
company in question will work with its creditors and the
court to come up with a repayment plan.
In case the company is not able to honor the terms of the
repayment plan, it must liquidate itself in order to repay
its creditors. The repayment terms are then decided by
the court.

Debt Restructuring vs. Debt Refinancing

Debt restructuring is distinct from debt refinancing. The
former requires debt reduction and an extension to the
repayment plan. On the other hand, debt refinancing is
merely the replacement of an old debt with a newer debt,
usually with slightly different terms, such as a lower
interest rate.