Major Types of Financial Restructuring

Debt restructuring is the process by which a company or entity that is experiencing financial distress and liquidity issues refinances its existing debt obligations in order to gain more flexibility in the short term as well as make its debt more manageable overall.

Fremont, CA: Financial restructuring is a specialized initiative undertaken to reorganize a business enterprise's financial assets and liabilities in order to create the most advantageous environment for that entity. It primarily entails reorganizing share capital and debt. Companies that undergo inefficient restructuring are frequently entitled to change their contractual relationships with lenders, shareholders, and other stakeholders in a favorable manner. It is a type of corporate action that seeks to change a company's debt operations and structure, with the ultimate goal of limiting financial harm and empowering it to tap more business opportunities. The company must carefully balance its debt and equity, and both of these factors are influenced by the business condition. In the following cases, management may be required to undertake financial restructuring:

Types of Restructuring

Stressed Debt Restructuring

Debt restructuring is the process by which a company or entity that is experiencing financial distress and liquidity issues refinances its existing debt obligations in order to gain more flexibility in the short term as well as make its debt more manageable overall. In general, it is a strategy for keeping a business afloat and getting it back on track financially. In such cases, the lender, creditor, or other parties will usually make an adjustment to smooth out the company's temporary difficulties with loan repayment.

Conversion of Debt to Equity

Conversion of debt into equity is also known as a'swap,' which is a type of financial restructuring arrangement between the company and the lenders in which the company's debt components are converted into the business's equity. In other words, the debt providers become shareholders in the company. A debt-equity swap typically occurs when a business is experiencing financial difficulties, but lenders decide to support it based on the viability of the business model and the commitment of the promoters.

Normal Debt Restructuring

In this process, a relatively healthy company refinances or swaps its high-interest debt for low-interest debt or revises its repayment schedule to better suit its business. The company can also consolidate multiple debts with higher interest rates and variable repayment terms into a single debt with lower interest rates and terms. In this case, funds that were previously used to pay down higher-interest debt can now be used to pay down the loan principal more aggressively. It is a tool for lowering the cost of capital while improving the company's overall financial efficiency.