Corporate Debt Restructuring is the process of realigning a business entity’s existing debts to increase its liquidity.
Most businesses, whether small scale or large scale, have multiple loans to run their business. When they reach a distressing level of debt management, the lenders and the management renegotiate some of the terms of the loans to arrive at a win-win situation.
Corporate Debt Restructuring can be done in many ways:
- Lowering the total outstanding on the loan
- Lowering the interest rate on the loan, or
- Increasing the tenure of the loan
These are the most common forms of Debt Restructuring. In some cases, where the loan amount is pretty huge, the lenders may initiate a Strategic Debt Restructuring scheme where they might waive off the loan amount in exchange for an equity stake in the company. This gives them the power to manage the company and take it in the direction of profit.
How is Debt Restructuring beneficial for Corporates?
The primary benefit of debt restructuring is the avoidance of bankruptcy. The mechanism of bankruptcy is daunting, and smaller companies would find it difficult to go through it. As a result, they will choose to give up some of their company's stakes to their lenders in the form of equities through corporate debt restructuring.
This also proves to be a win-win situation for both the lender and the borrower both face lesser losses compared to bankruptcy.