Financial restructuring is the process of reorganising the financial structure of a company, which consists mostly of equity capital and debt capital. Restructuring a company’s finances may be required by necessity or be an essential element of its financial strategy. This reorganisation of finances may occur on either the assets or liabilities side of the balance sheet. If one is modified, the other will be modified accordingly. In this article, restructuring finance, we take a look at the process involved and the options available to you.
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Debt restructuring
Restructuring debt is the process of rearranging a company’s whole debt capital. It entails a reorganisation of the balance sheet components, as it incorporates the company’s debt obligations. Equity restructuring is utilised less frequently as a financial instrument than debt restructuring. This is due to the fact that a company’s financial manager must continually consider possibilities for minimising the cost of capital and increasing the company’s overall efficiency, which requires a continuous assessment of the debt portion and recycling it to maximum efficiency.
Debt restructuring is possible under a variety of company scenarios. These can be broadly classified into three categories:
- A business in good health might engage in debt restructuring to improve its debt profile by taking advantage of market opportunities and substituting high-cost debt with low-cost borrowings.
- In order to minimise the cost of borrowing and enhance the firm’s working capital position, a company that is experiencing liquidity issues or limited debt payment capacity can restructure its debt.
- A company that is unable to meet its current financial obligations with its current resources and assets may also undergo restructuring. A firm that is bankrupt can undergo reorganisation in order to become solvent, eliminate its losses, and become viable in the future.
What Are The Components Of Debt Reorganisation?
The following are the components of debt restructuring:
Restructuring of long-term secured loans: Restructuring of secured long-term borrowings will be performed for the following reasons: reducing the cost of capital for healthy companies, boosting liquidity and increasing cash flows for a distressed company, and facilitating the company’s rehabilitation.
Restructuring of long-term unsecured loans: Restructuring of the long-term unsecured loans will depend on the form of borrowing. These may include public deposits, private (unsecured) loans, and privately placed unsecured bonds or debentures. The terms of public deposits can be discussed once again if the scheme is approved by the appropriate body.
Working capital borrowings are comprised of credit limits from commercial banks, loans, overdraft facilities, bill discounting, and commercial paper. All of them are secured by a lien on inventory and book debts, as well as a lien on other assets. The restructuring of secured working capital loans is nearly identical to that of term loans.
Restructuring of other short-term borrowings: In general, very short-term borrowings are not restructured. These can be renegotiated with new conditions. These short-term loans consist of inter-corporate deposits, clean bills, and clean overdrafts.
Equity restructuring
Restructuring the equity of a company is the process of restructuring the equity capital. It involves the reorganisation of the shareholders’ capital and the balance sheet’s reserves. Restructuring equity and preference capital is a highly regulated and complex legal process. Restructuring equity focuses primarily on the concept of capital reduction.
The following are some of the numerous equity restructuring techniques.
- Share capital can be restructured by purchasing shares from shareholders with cash. This reduces the company’s obligation to its shareholders, resulting in a capital decrease through the return of share capital. Alternately, the equity capital may be converted into redeemable preference shares or loans, which comes under the same category.
- Restructuring of equity share capital is possible through the use of suitable accounting entries to write down the share capital. This will help reduce the amount owing to shareholders by the corporation without actually repaying equity capital in cash.
- Restructuring can also be accomplished by decreasing or eliminating the shareholder dues.
- Restructuring can also be accomplished by consolidating the share capital or dividing the shares.
Why Would A Company Restructure Its Equity?
There are a number of reasons a company might want to consider restructuring its equity and these include:
- Eradication of excessive capitalisation
- Shoring up management stakes
- To give shareholders a reasonable exit mechanism during periods of low markets by giving them liquidity through buyback.
- Capital restructuring to achieve greater efficiency
- To eliminate accumulated deficits
- To deduct unrecognised expenses.
- To preserve debt-to-equity ratio
- In order to revalue the assets
- For raising new capital
Are There Any Indicators That Suggest A Company Is In Financial Distress?#
For a number of reasons, businesses might become distressed and face a growing danger of a cash (liquidity) deficiency. Obviously, the most prevalent cause is an unexpected decline in business performance. Nonetheless, a company in crisis typically exhibits warning signs such as:
- Fully Utilized Revolving Credit Facility
- Worsening Credit Metrics Indicating Reduced Liquidity
- Payment Delays to Suppliers/Vendors (i.e., Stretching of Accounts Payable)
- Sale-Leaseback Transactions (i.e., Selling of Assets & Leasing Them Back Straightaway)
Financial difficulties do not immediately indicate that a company has defaulted. As long as the business does not violate any covenants or miss payments (e.g., supplier invoices, interest on debt, or principal repayments), it can continue to operate even if it is losing cash, provided it has adequate reserves.
However, the majority of lenders implement safeguards that could still result in a technical default if specific “triggering” conditions occur. A credit rating downgrade, breach of a loan covenant, or failure to comply with other agreed-upon obligations are examples.
In each of the described circumstances, the lender can pursue legal action against the company (e.g., foreclosure), which is why businesses file for bankruptcy protection.
How we can help
We have a proven track record of helping clients deal with the process involved in financial restructuring. We will guide you diligently and ensure all checks are carried out swiftly and efficiently and we firmly believe that with the right solicitors by your side, the entire process will seem more manageable and far less daunting. You can read more about the range of corporate services we offer by clicking here: https://blackstonesolicitorsltd.co.uk/corporate-legal-services/
How to Contact Our Corporate Solicitors
It is important for you to be well informed about the issues and possible implications of financial restructuring. However, expert legal support is crucial in terms of ensuring your business is set up correctly.
To speak to our Corporate solicitors today, simply call us on 0345 901 0445, or click here to make a free enquiry. We are well known across the country and can assist wherever you are based. We also have offices based in Cheshire and London.
Disclaimer: This article provides general information only and does not constitute legal advice on any individual circumstances.
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