Debt Restructuring is a process of eliminating the
risk of default on an existing debt of an organization.
It can be carried out by those who are on the verge
of insolvency it may also include countries who are at the risk of defaulting
sovereign debt.
The restructuring process can be done by following
any or all of the below mentioned processes:
- Reducing
interest rates on loans or
- By
extending due dates of liabilities or
- Swapping debt for equity
At the time of liquidation, the senior debt holders are paid first.
There are cases wherein the creditors alter their terms and conditions and come
to common grounds to avoid bankruptcy.
By adopting any of the processes the chances of repayment of debt is
improved and thereby providing the organisation to pay back its creditors and
debt holders.
It’s a win-win situation for both company and lenders as restructuring helps
business to continue and survive and lenders also get a share of money which is
far more greater than what they could have received after liquidation.
Some of the ways through which the company can restructure are as
follows;
- Debt-Equity
Swap- A situation where creditors cancel the entire or
outstanding loans by taking equity in the company.
- Haircut
Restructuring - A process wherein a payment portion on a principal amount
or an outstanding interest is relaxed.
- Callable Bonds – A company issues this bond to protect itself in situations where interest payments cannot be made. It can be redeemed at times of decreasing interest rates allowing restructuring of debt in future as they can replace the existing one with a lower interest rate.
Regards
Shwetabh Singh
Kautilya
IBS Mumbai
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