Corporate Debt Restructuring: What it is, How it Works

Corporate Debt Restructuring

Investopedia / Eliana Rodgers

What Is Corporate Debt Restructuring? 

Corporate debt restructuring is the reorganization of a distressed company's outstanding obligations to restore its liquidity and keep it in business. It is often achieved by way of negotiation between distressed companies and their creditors, such as banks and other financial institutions, by reducing the total amount of debt the company has, and also by decreasing the interest rate it pays while increasing the period of time it has to pay the obligation back.

Occasionally, some of a company's debt may be forgiven by creditors in exchange for an equity position in the company. Such arrangements, which often are the final opportunity for a distressed company, are preferable to a more complicated and expensive bankruptcy.

Key Takeaways

  • Corporate debt restructuring refers to the reorganization of a distressed company's outstanding obligations to its creditors.
  • The purpose of a corporate debt restructuring is to restore liquidity to a company so that it can avoid bankruptcy.
  • A corporate debt restructuring usually reduces the levels of debt, decreases the interest rate on the debt, and increases the time to pay the debt back.
  • If creditors are not willing to negotiate, Chapter 11 bankruptcy filings can force them to do so as determined by a court ruling.

Understanding Corporate Debt Restructuring

The need for a corporate debt restructuring often arises when a company is going through financial hardship and is having difficulty meeting its obligations, such as debt payments. Put simply, a company owes more debt (and debt payments) than it can generate in income. If the troubles are enough to pose a high risk of the company going bankrupt, it can negotiate with its creditors to reduce these burdens and increase its chances of avoiding bankruptcy.

In the U.S., Chapter 11 proceedings allow for a company to get protection from creditors in the hopes of renegotiating the terms on the debt agreements and surviving as a going concern. Even if the creditors don't agree to the terms of a plan put forth, the court may determine that it is fair and impose the plan on creditors.

Corporate Debt Restructuring vs. Bankruptcy

Corporate debt restructurings, also known as "business debt restructurings," are often preferable to bankruptcy, which can cost thousands of dollars for small businesses and many times that for large corporations. Only a fraction of companies that seek protection from their creditors via a Chapter 11 filing emerge intact, partly due to a shift in 2005 to a regime that favored meeting financial obligations over keeping companies intact via legal protection.

The greatest cost of corporate debt restructuring is the time, effort, and money spent negotiating the terms with creditors, banks, vendors, and authorities. The process can take several months and entail multiple meetings.

One common method for restructuring corporate debt is with a debt-for-equity swap in which creditors accept a share of a distressed company in exchange for forgiveness of some or all of its debt. Large corporations that are under significant threat of insolvency often utilize this strategy, usually with the end result of creditors taking over the company.

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