How Debt Restructuring Can Help Companies Avoid Bankruptcy?

Understanding Debt Restructuring:

Once a prominent player in India’s aviation industry Jet Airway’s demise serves as a cautionary tale of how unmanageable debt can cripple even a prominent player in a competitive industry. The airline's ambitious growth strategy, while initially promising, ultimately led to a crippling accumulation of debt. Rising operational expenses, including fuel costs and aircraft leasing fees, coupled with aggressive competition, eroded profitability and strained the company's finances. This created a cycle where Jet Airways struggled to meet its financial obligations, ultimately impacting its ability to maintain operations and service its customers effectively

In a world where growth and success are often driven by the pursuit of opportunities, debt has become a silent companion for many businesses. This uninvited guest may bring about benefits, such as expanding operations or investing in innovative projects, but it can also lead to financial strain and instability.

Debt restructuring is strategic negotiation where a company facing significant financial distress attempts to renegotiate its existing debt obligations with its creditors. This can involve a variety of tactics, from extending repayment schedules and lowering interest rates to converting debt into equity. The ultimate goal is to improve the company's financial health, allowing it to continue operating, investing in its future, and ultimately, repay its debts.

Signs Indicating the Need for Debt Restructuring:

Debt significantly impacts businesses, hindering growth and risking insolvency. Warning signs include:

Debt Restructuring vs. Refinancing: Which Option is Best for Your Company?

Dealing with a serious debt situation can be overwhelming, but two viable solutions come to the forefront: debt restructuring and refinancing. While both options aim to alleviate debt payment pressures, they cater to different needs.

Debt Restructuring:

Think of debt restructuring as a lifeline you can grab. It's like going to your current lenders and saying, "I am having trouble making my payments, can we talk about it?". With debt restructuring, you are trying to renegotiate the terms with the current lenders. This often includes a reduced interest rate and extension of the payment terms and in certain instances, the debt can be forgiven. This helps reduce the pressure of the cash flow, with the overall aim of helping to survive.

Debt Refinancing:

Refinancing is similar to getting a new loan, but with a better deal. It's a chance to replace your existing debt with a new loan that offers more favourable terms, such as lower interest rates or a longer repayment period. This can help you regain control of your finances and start fresh.

In the complex landscape of debt management, both debt restructuring and refinancing offer valuable pathways to financial stability. Debt restructuring provides immediate breathing room through altered terms, while refinancing promises long-term savings via more favourable rates. The optimal choice hinges on your individual circumstances Thoroughly analyse your situation, compare the potential benefits of each option, and choose the strategy that best aligns with your path to financial freedom.

Types of debt Restructuring:

Imagine a bustling factory floor, the roar of machinery, the glow of molten steel. This is the essence of Jindal Steel and Power Limited (JSPL), a prominent Indian company with a global footprint in steel, power, and infrastructure. But even giants can face turbulent waters. JSPL, like many businesses, has navigated periods of significant debt. This is where debt restructuring steps in – a critical process that can be the difference between survival and struggle for a company.

Here are some key types of debt reconstruction:

1 .Rescheduling of Debt:

Extending the repayment period (maturity) of debt to lower the immediate burden of loan instalments.

2. Reduction in Interest Rate (Rate Cut)

Negotiating a lower interest rate with lenders reduces the cost of servicing debt.

3. Conversion of Debt into Equity:

Lenders convert debt into equity to reduce the company's debt burden and increase lenders' stake in the company's future performance. During the company's restructuring , Jindal Steel's lenders considered converting a portion of the debt into equity. This move would have increased lenders' stakes in the company and provided a more stable revenue stream.

4. Moratorium on Repayment

A temporary suspension or delay in debt repayments (principal and/or interest) provides immediate cash flow relief. During the COVID-19 pandemic , Many Indian companies, received a moratorium on loan repayments from lenders. This temporary relief helped the company conserve cash and manage its finances.

5. Asset Sales/Divestitures:

Selling off non-core assets or businesses generates cash to pay down debt.

6. Corporate Debt Restructuring (CDR) Mechanism (Now replaced by IBC):

A formal mechanism involving a group of lenders agreeing on a restructuring plan to address debt issues collectively.

Risks and Challenges of Debt Restructuring

1.Financial Fallout: Lower credit rating, strained creditor relationships, and potential failure to achieve desired results, possibly leading to bankruptcy.

2.Operational Disruption: Business disruptions due to the time-consuming process, diverting resources and creating uncertainty for employees, suppliers, and customers.

3.Legal and Regulatory Hurdles: Complex legal issues, potential for litigation, and the need for specialized expertise.

4.Valuation and Negotiation Challenges: Difficulty in valuing assets and the complexities of negotiating with multiple creditors with varying interests.

Conclusion

Debt restructuring can be a valuable tool for companies facing financial challenges, but it's important to be aware of the potential risks and challenges involved. By carefully assessing the situation, seeking professional advice, and developing a sound restructuring plan, companies can increase their chances of success. At BC Shetty & Co, we offer professional financial advice, helping businesses navigate financial challenges with tailored strategies. Contact us today!