How does Financial Restructuring Work?

Overdraft facilities, commercial paper, demand loans, and commercial bank credit limits belong to the category of working capital borrowing

Fremont, CA: In financial restructuring, equity capital and debt capital are reshuffled and reorganized into the financial structure. The decision to reorganize the company's finances can be driven by compulsion or by the company's strategy for its financial future. There are two ways to restructure the balance sheet: from the assets side or from the liabilities side. A change in one will result in an adjustment in the other.

The two components of financial restructuring are;

• Debt Restructuring

• Equity Restructuring

1. Debt Restructuring

When a company restructures its debt capital, the company's entire debt is reorganized. Due to the company's debt obligations, the balance sheet items need to be rearranged. When compared to equity restructuring, debt restructuring is a more common financial tool. 

It is possible to restructure debt according to the company's circumstances. In general, these can be categorized into three categories.

1. A healthy company can restructure its debt using market opportunities to replace its existing high-cost debt with low-cost borrowings by utilizing market opportunities.

2. In order to reduce borrowing costs and improve working capital, companies that experience liquidity problems can go in for debt restructuring.

3. Restructuring can also be undertaken by a company that is unable to meet its present financial obligations with its current assets and resources. Restructuring is an option for insolvent companies so they can become solvent, avoid losses, and become viable again.

Components of debt restructuring

The components of debt restructuring are as follows

• Borrowings secured for a long period of time may be restructured

• Unsecured long-term borrowing restructuring

• Work capital loan restructuring

• Borrowings with other terms that need to be restructured

Restructuring of secured long-term borrowings: For the following reasons, we will structure secured long-term borrowings in order to lower the cost of capital for healthy companies, improve liquidity and increase cash flows for sick companies, and also enable them to be rehabilitated.

Inspecting and restructuring long-term unsecured borrowings: Depending on the type of borrowing, long-term unsecured borrowings will be evaluated. Deposits, private loans (unsecured), and bonds or debentures placed privately can be utilized as forms of borrowing.

Restructuring of secured working capital borrowings:

 Overdraft facilities, commercial paper, demand loans, and commercial bank credit limits belong to the category of working capital borrowing. A charge on inventory, book debts, and other assets secures all of these obligations. 

Restructuring of other short-term borrowings: 

Restructuring is not typically done for very short-term borrowings. Renegotiating these terms is indeed possible. In addition to inter-corporate deposits, clean bills, and clean overdrafts, these types of short-term borrowings are also available.