Compiled by Parshva Shah
Financial restructuring is the process of reshuffling or reorganizing the financial structure, which primarily comprises of equity capital and debt capital. Financial restructuring can be done because of either compulsion or as part of the financial strategy of the company. This financial restructuring can be either from the assets side or the liabilities side of the balance sheet. If one is changed, accordingly the other will be adjusted.
The two components of financial restructuring are:
It is an arrangement permitting entities to decrease or negotiate their outstanding debts with the con sent of creditors and lenders. By way of this Restructuring, entities can prevent default or take benefit of lower interest rates, extended credit terms etc. It refers to the reallocation of resources by way of altering the debt terms.
Why debt restructuring is needed?
Following are the types of Debt Restructuring
- Stressed Debt Restructuring: It’s a process wherein a company experiencing financial distress and liquidity issues refinance its present debt obligations to increase more flexibility in the short-term and makes their debt more manageable generally. It’s a strategy for keeping the entity afloat & getting the entity back on path financially. Usually, in such conditions, an adjustment is made by the creditor, lender, etc, to smoothen temporary problems towards loan repayment faced by the entity or company.
- Normal Debt Restructuring: In this type of debt restructuring, a relatively healthy company swaps or refinances their high-interest rate debts into low-interest rate debts or amend repayment schedule suiting their business. The entity can also swap its multiple debts having high interest rates and uneven repayment terms into a single debt with good interest rates and repayment terms.
- Conversion of Debt to Equity: It is also known as “Swap”, which is a type of financial restructuring arrangement between the lenders and the company under which the debt sections of the company or entity are converted into equity of the business. In simple terms, the debt providers become owners of the business. A debt-equity swap generally happens in cases where the business is under financial pressure, but the lenders decide to support examining viability in the business model and the promoters’ commitment.
Equity restructuring is the process of reorganizing the equity capital. It includes reshuffling of the shareholders capital and the reserves that are appearing in the balance sheet. Restructuring of equity and preference capital becomes a complex process involving a process of law and is a highly regulated area. Equity restructuring mainly deals with the concept of capital reduction.
The following are the some of the various methods of equity restructuring.
- Repurchasing the shares from the shareholders for cash can do restructuring of share capital. This helps in reducing the liability of the company to its shareholders resulting in a capital reduction by returning the share capital. The other method that falls in the same category is to change the equity capital in to redeemable preference shares or loans.
- Restructuring of equity share capital can be done by writing down the share capital by certain appropriate accounting entries. This will help in reducing the amount owed by the company to its shareholders without actually returning equity capital in cash.
- Restructuring can also be done by reducing or waiving off the dues that the shareholders need to pay.
- Restructuring can also be done by consolidation of the share capital or by sub division of the shares.
Reasons behind equity restructuring
The following are the reasons for which equity restructuring is done:
- Correction of over capitalization
- Shoring up management stakes
- To provide respectable exit mechanism for shareholders in the time of depressed markets by providing them liquidity through buy back.
- Reorganizing the capital for achieving better efficiency
- To wipe out accumulated losses
- To write off unrecognized expenditure
- To maintain debt-equity ratio
- For revaluation of the assets
- For raising fresh finance
A Sound Financial Consultant can place your company in a better position and can suggest you suitable restructuring options
When the suitable action course is agreed upon, it should be executed smoothly and quickly to come out of the existing financial issues without troubling the business. Planning for possible targets for the turnaround of a business, setting aside time to estimate the impact, and being open to creative concepts are also vital for measuring success. But financial restructuring is a dynamic process due to which any alterations in external or internal factors should be consulted before implementing.
Financial Restructuring though involves reasonable cost, can have a positive impact on the business, and it can yield superior returns by maximising value for all stakeholders.