Corporate Refinancing

Corporate Refinancing

Investopedia / Mira Norian

What Is Corporate Refinancing?

Corporate refinancing is the process through which a company reorganizes its financial obligations by replacing or restructuring existing debts. Corporate refinancing is often done to improve a company's financial position. Through refinancing, a company can receive more favorable interest rates, improve their credit quality, and secure more favorable financing options. It can also be done while a company is in distress with the help of debt restructuring.

Generally, the result of a corporate refinancing is reduced monthly interest payments, more favorable loan terms, risk reduction, and access to more cash for operations and capital investment.

Understanding Corporate Refinancing

One of the biggest drivers of corporate refinancing is the prevailing interest rate. Companies can save significantly by refinancing their existing debt with debt at a lower interest rate. Such a move can free up cash for operations and further investment that will ultimately bolster growth.

Key Takeaways

  • Corporate refinancing is a process through which a company can reorganize its financial obligations by replacing or restructuring existing debts.
  • Some of the goals of corporate refinancing are to reduce monthly interest payments, find more favorable loan terms, reduce risk, and access more cash.
  • There are generally significant costs involved in corporate refinancing.

When a company issues new debt to retire existing debt, it will most likely reduce its coupon payments, which reflect the current market interest rate and the company's credit rating. The result of a corporate refinancing is generally an improvement in its operational flexibility, more time and cash resources to execute a business strategy, and a more favorable overall financial position. One way a company can achieve this is by calling its redeemable or callable bonds, then reissuing them at a lower rate of interest.

Another factor that can influence the timing of a corporate refinancing is if a company expects to receive a cash inflow from a customer or other source. A significant inflow can improve a company's credit rating and bring down the cost of issuing debt (the better the creditworthiness, the lower coupon they will need to pay). Companies in financial distress may refinance as part of a renegotiation of the terms of their debt obligations.

A less popular corporate refinancing strategy involves spinning off a debt-free part of a company and financing that subsidiary. The subsidiary is then used to buy parts of the parent as a discount. This strategy can dissuade potential acquirers.

Companies may also issue equity in order to retire debt. This can be a good strategy if shares are trading near all-time highs and debt issuance would be comparatively expensive because of a poor company credit rating or high prevailing interest rates. Selling equity to reduce debt has the effect of improving a company's debt-to-credit ratio, which improves its future financing prospects.

Special Considerations

Whether a company is large or small, there are significant costs built into the refinancing process. Large companies that can issue debt and equity must enlist the help of a team of bankers and attorneys to complete a successful financing process. For small businesses, there are bank and title fees, and payments to bankers, appraisers, and attorneys for a variety of services.