There is a big concern that the business world is falling into too much debt.
Corporate debt restructuring (CDR) has always been a topic of much discussion. After all, no one wants to file for bankruptcy. When you hear about a firm heading the CDR way, you follow their process with intrigue and sympathy.
What is debt restructuring?
A financially distressed company usually heads towards corporate debt restructuring. CDR is the process of reorganization of a company’s outstanding dues and regaining liquidity. Mostly, this happens by discussing the topic with the company’s creditors like banks or other institutions.
Some steps include
- Reducing the overall amount of debt on a company
- Decreasing their interest rate
- Extending the payback period
- In some cases, asking the creditors to forgive part of the debt
These steps help a company regain its financial stability and avoid bankruptcy. Although the topic of bankruptcy looms around, as the laws governing both are similar.
Rules of bankruptcy and CDR
Most restructuring steps in the U.S are governed by the U.S Bankruptcy Code, also known as Chapter 11 or ‘The Code.’ These laws protect a firm from creditor harassment while it is going through the restructuring process. An automatic stay imposed on the firm is a lifesaver because the creditor has to wait under legal obligations.
The code also assigns the claim holders to specific categories or classes. Each class is dedicated to a particular exchange, and all claims placed within one class should be most similar. For example, all trade debt cases will go in one class while secured bank debt in another category. Next, you undergo the corporate debt restructuring process just like the class advises you.
The absolute priority rule gives each creditor class compensation for the face value of their claims, made before bankruptcy. However, stockholders often deviate from the law and take part in a reorganization plan that pays lesser than the senior applications.
If you are a firm filing for CDR, you go through these legal steps
- The first plan must be filed within 120 days of the first Chapter 11 filing
- It must get accepted by creditors by not more than 60 additional days after this, where they can come up with their plan
- The plan goes through a vote for acceptance of claim holders in each class
- The court can enforce the plan on a dissenting class if the plan is fair
- It is beneficial for all parties to avoid the implementing of a plan, as it is time-consuming and costly
A standard method for restructuring company debt is to offer equity in exchange for debt. Large corporations use this strategy to get more liquidity. As a result, creditors take over the company, but the entity remains.
These business decisions are best taken with the help of a legal advisor who can guide you through the process. The debt restructuring process will be as smooth as your team makes it. Caesar’s Entertainment in America went through something similar.
Caesars Entertainment restructuring
Most Americans are aware of the entertainment giant Caesars. The company has a massive presence in the shiny areas of metropolitan cities. In 2014, they announced that Caesars Entertainment Operating Co. was under $18 million of debt and will go through a significant deleveraging.
The restructuring involved a first-time lien loan, credit facility amendment, and sale of some of their equity to private investors. Caesars explained that they would use this equity for liability management and debt reduction.
In this case, the company not only settled debts, but they also on-boarded some new investors companies to fare well in the future. When you have a valuable asset and sister companies, you can get more solid guarantees until you get back on track.
How Indian Kingfisher Airlines went the CDR way
Due to the slowdown in economies and rising maintenance charges, aviation companies like Kingfisher had to go through a restructuring process. Kingfisher was also facing pricing pressure due to its competition. The company went through to an intensive borrowing period, which further complicated things.
In 2012, Kingfisher’s debt increased to 13750 Crore Rupees. It was impossible to settle this amount, so the company went to banks to substitute the high-cost borrowing with low-cost currency debt. The 13 banks holding shares in Kingfisher sat down and evaluated the condition.
Financially distressed companies can benefit from a debt restructuring, and avoid bankruptcy. If it was not for CDR, companies could easily fall down the bankruptcy trap. You can either settle the score internally or externally, based on the situation/number of lenders.
Some analysis of stock returns found out that the market also discriminates between these two firms. In the end, it is always better for companies to restructure their debt privately.