What is Corporate Refinancing
Corporate refinancing is the process through which a company reorganizes its financial obligations by replacing or restructuring existing debts. A corporate refinancing is often done to improve a company's financial position as prompted by favorable interest rates, improving credit quality, and in response to more favorable financing options. It can also be done while a company is in distress with the help of a 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.
Breaking Down 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 rate. Such a move can free up cash for operations and further investment that would bolster growth.
Corporate Refinancing and Debt Issuance
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 that are 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. Such a strategy can dissuade potential acquirers.
Corporate Refinancing and Equity
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 due to 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.
Corporate Refinancing Costs
Whether a company is large or small, there are not insignificant 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. For small businesses, there are bank and title fees, and payments to bankers, appraisers, and attorneys for a variety of services.