What Is Restructuring?

Restructuring is an action taken by a company to significantly modify the financial and operational aspects of the company, usually when the business is facing financial pressures. Restructuring is a type of corporate action taken that involves significantly modifying the debt, operations or structure of a company as a way of limiting financial harm and improving the business.

When a company is having trouble making payments on its debt, it will often consolidate and adjust the terms of the debt in a debt restructuring, creating a way to pay off bondholders. A company restructures its operations or structure by cutting costs, such as payroll, or reducing its size through the sale of assets.

[Important: A company undertakes a restructuring to modify the financial and/or operational aspect of its business, usually when faced with a financial crisis.]

Understanding Restructuring

A company may restructure as a means of preparing for a sale, buyout, merger, change in overall goals or transfer to a relative. The company may choose to restructure after it fails to successfully launch a new product or service, which then leaves it in a position where it cannot generate enough revenue to cover payroll and debts.

As a result, depending on agreement by shareholders and creditors, the company may sell its assets, restructure its financial arrangements, issue equity for reducing debt, or file for bankruptcy as the business maintains operations.

How Restructuring Works

When a company restructures internally, the operations, processes, departments, or ownership may change, enabling the business to become more integrated and profitable. Financial and legal advisors are often hired for negotiating restructuring plans. Parts of the company may be sold to investors, and a new chief executive officer (CEO) may be hired to help implement the changes.

The results may include alterations in procedures, computer systems, networks, locations, and legal issues. Because positions may overlap, jobs may be eliminated and employees laid off.

Restructuring can be a tumultuous, painful process as the internal and external structure of a company is adjusted and jobs are cut. But once it is completed, restructuring should result in smoother, more economically sound business operations. After employees adjust to the new environment, the company is typically better equipped for achieving its goals through greater efficiency in production.

Special Considerations

Costs can add up quickly for things such as reducing or eliminating product or service lines, canceling contracts, eliminating divisions, writing off assets, closing facilities, and relocating employees. Entering a new market, adding products or services, training new employees, and buying property results in extra costs as well. New characteristics and amounts of debt often result, whether a business expands or contracts its operations.

Examples of Restructuring

In late March 2019, Savers Inc. the largest for-profit thrift store chain in the United States reached a restructuring agreement that cuts its debt load by 40% and sees it taken over by Ares Management Corp. and Crescent Capital Group LP, Bloomberg reported.

The out-of-court restructuring, which was approved by the company's board of directors, includes refinancing a $700 million first-lien loan and lowering the retailer's interest costs. Under the deal, the company's existing term loan holders get paid in full, while senior noteholders swapped their debt for equity.

In July 2016, Arch Coal, Inc. completed a settlement with the Official Committee of Unsecured Creditors (UCC) with some of its senior secured lenders holding over 66% of its first-lien term loan. As part of the company's restructuring plan, Arch filed an amended Plan of Reorganization involving the settlement, and a related Disclosure Statement with the U.S. Bankruptcy Court for the Eastern District of Missouri. After the approval of the Disclosure Statement, Arch plans to gain lender approval and request the Bankruptcy Court’s confirmation of the Plan, according to the timeline stated in the Global Settlement Agreement.

Key Takeaways

  • Restructuring is a corporate action undertaken by a company to significantly change its financial or operational structure, typically when it is under financial duress.
  • Companies may also restructure when preparing for a sale, buyout, merger, change in overall goals, or transfer of ownership.
  • When the sometimes challenging process of restructuring ends, the company should ideally be left with smoother, more economically sound business operations.