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What is debt restructuring in financial restructuring?
Financial restructuring is a process of reorganizing companies’ financial structure. Companies’ financial structure consists of both debt and equity capitals. Reorganizing financial structure can be from the asset side or liability side of the balance sheet.
Debt restructuring
In this process, the debt capital of the company is reorganized by reorganising the items in the balance sheet. It is used as a company financial tool rather than equity restructuring because, financial manager looks to minimize the cost of capital by improving efficiency.
Ways of debt restructuring are as follows −
Change in debt part by using the market opportunities by low cost borrowings.
Increase in working capital by reducing cost of borrowing.
Insolvent companies will go for restructuring to free from losses and make assets viable in future.
Components
The components of debt restructuring are as follows −
Restructuring of secured long-term borrowings − Reduction in cost of capital to improve liquidity and cash flows.
Restructuring of unsecured long-term borrowings − Public deposits, private loans, privately placed, unsecured bonds/debentures.
Restructuring of secured WC (working capital) borrowings − Credit limits, demand loans, overdrafts facilities, bill discounting, commercial paper are secured by charging on inventory, books debts and on assets.
Restructuring of other term borrowings− Inter-corporate deposits, clan bills and overdrafts can be renegotiated with new terms.
Advantages
The advantages of debt restructuring are as follows −
Ledgers get legal protection.
Protection to company assets.
Employees’ jobs are guaranteed.
Creditors get better recovery.
Protection to the company from closing down its operations.
Disadvantages
The disadvantages of debt restructuring are as follows −
Low-interest payments and increase schedule payments.
Sometimes write-offs have an impact on creditors’ balance sheets.
Assurance not given for timely payments and smooth run of business.
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