Financial restructuring refers to reorganising a business enterprise’s financial liabilities and assets to make the environment more beneficial for the entity. Primarily, it involves reorganising share debt and capital. With efficient restructuring, a company may save itself from changing its contractual relationships with shareholders, lenders and other stakeholders. It is a corporate action that modifies a company’s debt structure and operations, ultimately aiming to limit the financial harm and empowering it to take advantage of available business opportunities.
A company must strike a balance between its equity and debt, and the business’s condition influences these factors. It may seek financial restructuring under the following circumstances:
- Failure to meet its current financial obligations
- Under-utilisation of its production capacity
- More capital required to meet customer demands
- Restricted access to more credit from suppliers and other parties
Financial restructuring is often correlated to corporate restructuring, which also involves restructuring a company’s general composition and function. Generally, companies seek restructuring solutions from investment banks when their performance cannot keep pace with their current financial liabilities. The following are the steps involved in devising a strategy for restructuring.
Assessing the situation
Determine the company’s enterprise value and what operational actions may bring the business back on track. For instance, if the equity will return, raising and injecting money into it may help buy time. However, a turnaround plan would be more appropriate if the equity is difficult to recover. Based on the above analysis, if funding a turnaround does not make sense for liability and equity stakeholders, a financial restructuring would be more appropriate.
Getting professional help
Financial restructuring is a complicated process that requires the services of professional restructuring solution providers. Most investment banks have dedicated restructuring departments that restructure finances on the debtor’s or creditor’s behalf. They guide their clients to take the best decisions that protect their interests in the best possible way.
Identifying creditors and negotiating
Credit is the liability on a company’s balance sheet, which is partially in the money. If the evaluators evaluate a company’s value and provide funds to pay the creditors, the borrower may pay some creditors partially and others in full. The restructuring team negotiates with the creditors to find the best repayment plan while protecting all parties’ interests. Sometimes, the creditors may agree to take control. If not, the company may need to find a buyer.
Structuring a transaction
Creditors taking control of the company leads to reorganisation. This means the business will continue operating as a legal entity, although with changed ownership. If not, another option includes asset sales. In this arrangement, a new entity gets the business assets while leaving some of its liabilities behind.
Enlisting the guidance of experienced and qualified experts would guide a company to the best achievable outcome.