What is Corporate Debt Restructuring?

Osmand Vitez

Corporate debt restructuring is a process companies go through in order to reorganize their capital position. Many companies use external debt financing to pay for various activities, assets, or other business-related items. This debt typically includes an agreement to repay the debt at a certain interest rate and payment for a set number of months or years. Organizations may use corporate debt restructuring to help make these payments easier if the company falls under difficult financial times. This restructuring does not usually involve any loan forgiveness by creditors.

The corporate debt restructuring process usually starts with a discussion with lenders regarding current financial difficulties.
The corporate debt restructuring process usually starts with a discussion with lenders regarding current financial difficulties.

A number of options are usually available for companies going through corporate debt restructuring. To start the process, companies often need to engage in discussions with their lenders regarding current financial difficulties. A common request is to ask for an extension. This may allow the company to lengthen the original loan length, thereby reducing current payments to a more manageable level. Extremely difficult times may also result in an extension where the lender lets the company skip a number of payments and adds them on at the end of the loan. For example, a company receiving reprieve on payments for six months will need to make six additional payments after the original loan ends.

Another option for corporate debt restructuring is to consolidate a number of different loans into one large debt package with a single payment. This option is often more lucrative to companies with several loans at high interest rates. Debt consolidation may depend on the state of the company’s current loans and willingness of lenders to allow consolidation to occur. Companies with several unpaid loans in default may find lenders will block the consolidation option because they do not want to lose the money wrapped up in late fees or penalties. Balking at this option may also be a form of punishment to the company.

Because corporate debt restructuring does not result in any financial loss to lenders, companies should be able to avoid negative records or comments assessed on their business credit. However, companies with a long track record of obtaining loans, claiming financial difficulty and going through a debt restructure may find themselves under more scrutiny during future loan application processes. Banks and other lenders typically look unfavorably on companies that cannot run their business without running into financial problems. The options for restructuring debt may also become an issue, where the company can only use organizations that offer more unfavorable terms than a traditional lender.

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