Corporate restructuring is a major process. It is used to modify any company’s business structure, ownership, or operations. This kind of restructuring procedure is done with the motive of increasing a company’s efficiency, profitability, and adaptability to the new market conditions. Generally, the time of financial crisis happens during restructuring. However, it can also be employed as an active strategy of growth enhancement for the companies, mergers and acquisitions deals, or tax reduction. This article explores the basic concepts of corporate debt restructuring; reasons for restructuring a business; various types of restructuring; stages involved in the whole process; key considerations and risks.
Definitions-
- Corporate Restructuring
This term refers to the process of reconfiguring the overall hierarchy, internal structure, and procedures in operations. Most companies have to go through the restructuring process for specific objectives. The objectives may be such as responding to a changing and volatile market environment, becoming more efficient and competitive in the industry, and many more.
This entire process is a complicated one to perform and generally involves changing the hierarchy of an organization, reassessing the resources, selling assets, and streamlining various business strategies.
- Corporate Debt Restructuring (CDR)
It refers to the process of reorganizing the company’s outstanding liabilities to improve its current financial stability, ease its financial distress situation, or avoid bankruptcy. It normally involves the process of renegotiating various terms and conditions of debt agreements with associated creditors. This can include adjusting repayment schedules, advancing loan tenures, reducing interest rates, or converting debt into equity.
Here, the motive is to give some comfort to the company by making the debt a little easier to handle. It will also help the creditors to recover a certain part of the money they are owed. To understand the debt restructuring process in real life, let’s take the example of General Motors, or GM. In the 2008 financial crisis, GM restructured its debt in bankruptcy by reducing its debt and converting part of it into equity.
Types of Corporate Restructuring-
The following section briefly explains the various types of restructuring:
- Financial restructuring – This type of restructuring mainly focuses on the change in the financial structure of the company. The changes could be anything such as renegotiation of the existing debts, issue of new equities, or change in the capital money structure of the company. This is generally done for stabilizing the balance sheet of a company or improving its financial health. Two categories are – debt restructuring and equity restructuring.
Debt restructuring involves modifying the terms of existing loans or debts to avoid insolvency of the company. The most common techniques in this type of restructuring include extending repayment periods/timelines, reducing interest rates, or converting the company’s debts to equities.
Equity restructuring mainly aims to alter only the company’s equity arrangement by issuing new shares to them or buying back outstanding shares of the company.
- Operation restructuring – In this type of restructuring, the entire rebuilding process of the company’s operations is undertaken to enhance the profit levels. This will involve layoff initiatives, clearing off the non-core business units, simplifying supply chains or business operations, and outsourcing several business functions to external service providers.
- Divestitures and Spin-offs- Such kind of restructuring arises when a company divests some non-core/less than vital assets or gives rise to new business lines by fragmenting the existing ones, improving the focus and value of concentration on core business activities.
- Mergers and Acquisitions– This is probably the most common kind of corporate restructuring. M&A would contain the process of consolidating towards another company or acquiring towards others. It usually becomes of interest for purposes like increasing its market, lowering costs that businesses incur, or creating profitability. The organizational post-merger integration will be a great procedure accompanied by a high organizational structuring to facilitate ease into business operations.
- Organizational restructuring – It focuses on changing the internal management structure of the company. This type of restructuring will mostly include processes like changing the overall hierarchy of the business, changing the roles of staff, combining departments, or decentralizing the business authority power to generate more efficient workflows.
Why is Corporate Restructuring Required?
There are lots of reasons why companies need restructuring. Some of the most important and commonly seen reasons why a business implements a restructuring process in their company are explained in the below section:
- One of the major and most common reasons is the financial difficulties. Most companies that are facing insolvency issues, bankruptcy, or cash flow issues perform the restructuring process to stay on track in the business for a certain time. Corporate Debt Restructuring is the most commonly used method for avoiding the situation of company liquidation.
- Another reason is the benefit of tax efficiency. Some companies perform the restructuring process to reduce their tax liabilities. Companies can save a considerable amount of money and boost their profit by changing the ownership structure or relocating the business to a tax-friendly jurisdiction.
- Mergers and acquisitions also require the restructuring process. Restructuring is an essential component in the post-merger integration process. It can enable organizations to combine their resources, simplify operations, and eliminate the issues of relatedness.
- Another reason is to facilitate the regulatory requirements. A restructuring process can be necessarily used to comply with new regulations such as financial reporting standards, certain environmental laws, or other industry-specific requirements.
- Restructuring will also provide strategic repositioning for a business. To adjust to the changing market conditions, most companies carry out the restructuring process. This will enable them to focus on their core businesses, exit from unprofitable markets, or enter new profitable markets.
Different Stages of Corporate Restructuring-
The entire restructuring process has to be performed in a well-structured manner to get an efficient outcome out of it. There are several stages in the entire process of restructuring, which are elaborated in the following segment:
- The first stage is the process of analysis and diagnosis. This stage involves assessing the financial and operational health of the company that wants to restructure. This process involves evaluating the company’s cash flow, debts, assets, profitability, and present market conditions so that they can identify the areas that require restructuring.
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- The next stage is the planning and strategy development. Once the company’s problems are identified and analyzed in the first stage, then the company can develop a complete restructuring plan. This comprehensive plan will outline all the specific and essential changes that are needed (for example – asset sales, layoffs, or debt restructuring) and set business goals for further improvement.
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- Now is the time for execution. This is the implementation phase where the developed restructuring plans and strategies are put into practice. It might involve several complex negotiations with creditors, layoffs of existing employees, sales of the company’s assets, or combining different departments.
- The final stage of corporate restructuring includes the process of monitoring and evaluation. After the execution of the restructuring process, it is essential to monitor the results continuously and make adjustments as and when necessary. Also, the Key Performance Indicators (KPIs) should be tracked to ensure that the restructuring process is achieving its expected outcomes in the future.
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Key Considerations and Potential Risks-
When conducting the restructuring procedure for a company there are certain factors to be considered and taken care of. It is important to avoid and mitigate any sort of potential risks involved in the due process. Some of them are listed below for a better understanding:
- One of the common areas to be taken care of is stakeholder management. The entire corporate restructuring can significantly affect shareholders, customers, employees, and creditors. It is essential to maintain transparent communication and continuous engagement with the company’s stakeholders to ensure a smooth transition of the restructuring process.
- The next one is legal and regulatory compliance. The restructuring process must comply with various legal requirements such as bankruptcy regulations, labor laws, and other related legislation laws. If the companies fail to comply with these laws and regulations, then they will have to face severe legal complications and fines.
- The cost of restructuring is an essential factor to be considered. Even though the process of restructuring offers lots of long-term benefits, it is associated with a considerable amount of short-term costs. These costs will include severance packages, legal fees, and restructuring consultants involved in the business. The companies must consider these expenses and need to ensure that these high short-term costs are manageable for them.
- Another factor is the cultural impact on the company. The changes made in the company’s management structure, employee layoffs, and new operational processes may affect the entire corporate culture. To achieve a long-term successful outcome through the restructuring process, you must ensure to maintain morale and smooth employee shifts throughout the process.
Key Techniques of Corporate Debt Restructuring-
Several key methods can be used to perform debt restructuring in companies. Some of these are briefly described in the following section:
- The first method is the debt rescheduling. In this method, the company and its creditors will agree to extend the time of repayment of existing debts. This will also include reducing the periodic payment amounts. This will provide immediate relief to the company by lowering its short-term cash flow requirements.
- The next one is the debt forgiveness. In this type, the creditors will agree to forgive a portion of the entire debt. They will allow the company to pay back only the rest of the reduced amount. This method is usually utilized when the creditors fear that the company might completely go to a loss and there will be no recovery in the future.
- Conversion of debt into equity is another key method in debt restructuring. Here, the creditors might agree to convert a portion of the debt incurred by the company into equity shares in the company. This will effectively reduce the company’s heavy debt burden and also give the creditors a stake of ownership in the company. Also, the creditors may choose this option only if they believe that the company’s long-term potential is strong and has a successful future ahead.
- The next key method is the debt-for-asset swaps. In this approach, a company might offer its physical or non-physical assets (for example – real estate or patent rights) to its creditors in exchange for reducing the debt money or canceling the entire debt.
- Finally is the debt consolidation. Here the companies will club multiple loans or debts into just a single and more manageable loan. This will provide the companies with better terms for the loan or loans to be taken with lower rates of interest.
Corporate Debt Restructuring Process-
Just like any other corporate restructuring procedure, this corporate debt restructuring also has a structured process. This process can ensure the efficiency of this debt restructuring procedure. Each stage involved in the entire process is briefly explained in the section below for better knowledge:
- This process first includes the assessment of the financial condition of the company at present. The company needs to assess its financial status or financial health position first, so that it would determine how grave or how big the debt issue or the financial problem of the company is. This procedure for assessing will involve looking into cash flows of the business, several possible solutions, and other obligations on debts.
- The next step involves engaging the creditors. The company essentially has to engage its creditors in this negotiation process. At such times, the creditors are bound to evaluate the proposal made by the company about restructuring and then accept or reject the new terms being offered. Generally, this whole process of negotiation is quite cumbersome and needs the services of third-party advisors or mediators.
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- At this stage, the parties concerned shall enter an agreement on new terms. Upon reaching agreement on terms and conditions with the party, a draft formal agreement is prepared. This formal agreement shall then specify such fundamental factors like the debt structure under new terms, time frames or payment schedules, and all the concessions available under the debtors.
- This last step allows the firms to do implementation and monitoring. Last but not the least, the debt restructuring program is implemented and carried out very efficiently. Most of the companies generally keep monitoring the financial performance closely, during this particular period as it assures that they meet up the new debt obligations in revised terms and conditions.
Conclusion-
Corporate restructuring is a great tool that can be used by companies who are looking to emerge from their financial difficulties, by those companies who want to reposition strategically in the market, and by those companies who intend to perform integration after doing some mergers and acquisition transactions deals. There are few challenges in the process of restructuring, such as it is a complex whole process and will include quite some short-term costs.
However, its long-term benefits like profitability improvement, streamlined operations, better adaptability in the new market, etc., will definitely make the entire restructuring a successful attempt for the businesses. The companies need to plan and execute the entire restructuring process while managing and mitigating the potential risks so that it will be successful in the long term.
FAQs-
1. Why do companies choose for corporate debt restructuring?
There are several reasons why a company chooses debt restructuring for their business. Some of the key reasons are listed below briefly:
- To Avoid Bankruptcy – When a company faces several financial difficulties, restructuring its existing debt will help in preventing bankruptcy cases. It is done by making the existing overdue debt more manageable and thereby allowing businesses to continue their operations.
- For Improving Cash Flow – Debt restructuring will lower a company’s monthly or periodic debt burdens or free up a certain amount of cash for other business operational expenses and investments. This is crucial for those companies that are struggling with liquidity issues.
- To Maintain Good Relationships with Creditors – With a proper and healthy negotiation process, the process of debt restructuring will help companies avoid bankruptcies, protect their long-term relationships with creditors, and also allow continued access to future financing options.
- Stabilizing Business Operations – The procedure of debt restructuring can give a company a considerable amount of time to stabilize its business operations and return to a good profitability ratio. It is done by easing their financial pressures for a short-term period.
2. What is a real world example of corporate restructuring?
Some of the examples of corporate restructuring that has occurred in our business world are briefed below:
- HP (Hewlett-Packard) – In the year of 2015, the famous company of HP was split into two separate entities, namely: HP Inc. (focused on personal computers and printers only) and Hewlett-Packard Enterprise (focused on enterprise services only). This restructuring process allowed both of these companies to focus on their core business areas of competencies and it has in turn led them to increased efficiency and profitability ratios.
- Nokia – The famous company Nokia underwent a complete restructuring process after its business division of mobile phones suffered a loss (due to high competition from the emergence of advanced smartphones). The company sold its mobile division to another famous company – Microsoft and refocused its efforts on network infrastructure only. This has enabled the company to revive back into the business world.
3. What are the risks and challenges involved in the corporate debt restructuring?
Some of the key risks and challenges that are involved in debt restructuring are explored in the below list:
- The most common risk is creditor reluctance: Here, the creditors might be hesitant to agree to carry out a debt restructuring process. It especially happens when the creditors believe that the company might not recover from its existing financial crisis.
- Another potential one is the risk of negative credit impact: Even though the process of restructuring avoids bankruptcy situations, it will still negatively impact the credit rating of a company.
- The next one is the problem of complexity: The whole process can be sometimes time-consuming and requires good legal and financial expertise. It is essential when multiple creditors are involved in the process.
- There is a potential risk of reputational damage: The process of debt restructuring might indicate the existing financial distress to business stakeholders and this can potentially harm the company’s overall reputation.
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