Debt Restructuring

Debt restructuring is a process used by companies, individuals, and even countries to avoid the risk of defaulting on their existing debts, such as by negotiating lower interest rates. Debt restructuring provides a less expensive alternative to bankruptcy when a debtor is in financial turmoil, and it can work to the benefit of both borrower and lender. Debt restructuring is available to companies, individuals, and even countries.

The debt restructuring process can reduce the interest rates on loans or extend the due dates for paying them back. A debt restructuring might include a debt-for-equity swap, in which creditors agree to cancel a portion or all of the outstanding debt in exchange for equity in the business. A nation seeking to restructure its debt might move the debt from the private sector to public sector institutions.

Some companies seek to restructure their debt when they are facing the prospect of bankruptcy. The debt restructuring process typically involves getting lenders to agree to reduce the interest rates on loans, extend the dates when the company’s liabilities are due to be paid, or both. These steps improve the company’s chances of paying back its obligations and staying in business. Creditors understand that they would receive even less should the company be forced into bankruptcy or liquidation.

Debt restructuring can be a win-win for both sides because the business avoids bankruptcy and the lenders typically receive more than they would have through a bankruptcy proceeding.

The process works much the same for individuals and for nations, although on vastly different scales.

Individuals hoping to restructure their debts can hire a debt relief company to help in the negotiations. But they should make sure they're dealing with a reputable one, not a scam.

Businesses have a number of tools at their disposal for restructuring their debts. One is a debt-for-equity swap. This occurs when creditors agree to cancel a portion, or all, of a company's outstanding debts in exchange for equity (part ownership) in the business. The swap is usually a preferred option when both the outstanding debt and the company's assets are significant and forcing the business to cease operations would be counterproductive. The creditors would rather take control of the distressed company, if that's necessary, as an ongoing concern.

A company seeking to restructure its debt might also renegotiate with its bondholders to "take a haircut"—meaning that a portion of the outstanding interest payments will be written off or a portion of the balance will not be repaid.

A company will often issue callable bonds to protect itself from a situation in which it can't make its interest payments. A bond with a callable feature can be redeemed early by the issuer in times of decreasing interest rates. This allows the issuer to restructure debt in the future because the existing debt can be replaced with new debt at a lower interest rate.

Countries can face default on their sovereign debt, and this has been the case throughout history. In modern times, some countries opt to restructure their debt with bondholders. This can mean moving the debt from the private sector to public sector institutions that might be better able to handle the impact of a country's default.

Sovereign bondholders may also have to take a haircut by agreeing to accept a reduced percentage of what they are owed, perhaps 25 per cent of their bonds' full value. The maturity dates on bonds can also be extended, giving the government issuer more time to secure the funds it needs to repay its bondholders. Unfortunately, this type of debt restructuring doesn't have much international oversight, even when restructuring efforts cross borders.

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