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What is Debt Restructuring?

Debt restructuring is a process of reducing the risk of financial distress from the company. The risk of default can also be controlled through this method. The interest rates can also be reduced by restructuring the debt of the company. It is a process that involves less expense than any other method used to control the company’s debt structure.

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How does it work? Types of Debt Restructuring

There are mainly three methods by which a company can opt for debt restructuring. Debt for equity swaps, Bondholder Haircut, Informal debt repayment agreements.

1. Debt for Equity Swap 2. Bondholder Haircuts

The bondholder haircut is also a type of debt for equity swap. A bond haircut means an interest rate lower than the market rate on any asset being used as collateral. It also works as a cushion for a loan. In bondholder haircuts, the interest rates are reduced to lower limits so that the bondholders can invest in the securities.

3. Informal Debt Repayment Agreement Debt Restructuring vs Debt Refinancing

Debt Restructuring is done when the company faces financial distress. The entire debt process is required to change, whereas the debt refinancing is referred to as the new contract often agreed at better terms.

Debt refinancing is a broader term as compared to debt restructuring.

The debt restructuring process may not cut short the interest rate, whereas the debt refinancing process can cut short the interesting process.

How to Achieve it? Reason for Debt Restructuring

This process helps to solve the financial crisis of the company. The bankruptcy can be avoided by restoring the liquidity of the company in a proper manner. Through the debt restructuring process, the company can also get relaxation from a legal perspective as well. The company assets can also be safeguarded with this process of debt restructuring. This process also involves the creditors for better recovery, and the creditors of the company can play a vital role in building up the company’s economy at this crucial time. This process is also cost-effective, and therefore most organizations plan debt restructuring for their companies.

Key Takeaways

This process can help the company to get free from legal obligations.

It has been proved that this method is cost-effective and can be used to benefit the entire company.

The creditors also play a very vital role in this process. The companies can reach out to them for some informal debt repayment settlements.

The companies have experienced that they have gained benefits from this process, and therefore this process is being used by most corporates.

Conclusion

Restructuring is referred to as a corporate management term. There are several reasons why restructuring is done. First, it is done to safeguard the company from financial distress. This process also helps to solve the liquidity problem faced by the companies. The companies are getting benefits from this process, and thus this restructuring process is gaining popularity amongst the corporates.