Companies face a lot of issues in terms of debt. Not only companies but also people out there associated with the companies know that the companies that are operating have a lot of debts, and at times, it gets too much for them.
Hence, companies may sometimes wish to restructure their debt in terms of the interest rate or so.
This process is referred to as Debt Restructuring. Not only companies but even many countries also use this process. Do you know what is debt restructuring?
If not, let’s know more about the restructuring process.
Debt restructuring is process companies and/or countries use to reduce debt risk, lowering interest rates. It can also be referred to as corporate debt restructuring.
Corporate Debt Restructuring or CDR is restructuring or reorganising the outstanding debts of a company when the company finds it extremely difficult to pay the debt.
CDR includes the following aspects:
- measures for a moratorium,
- expanding the responsibilities with a longer time frame,
- part conversion,
- conversion of the debt into equity,
- preferred capital, or ZRDs,
- interest rate reduction and promotional payments
- donation or sale of surplus property
Debt restructuring is done when companies face a lot of financial difficulties, and it is getting very difficult and challenging for them to resolve the issues.
Of course, companies require a lot of resources to build a product which then requires financial resources.
Not always do companies have reliable financial resources to go by, so they borrow money from people out there who may be interested in crediting the cash to the company. This can thereby result in the vicious cycle of debt of companies.
Getting out of this cycle is important yet challenging. Hence, companies go for debt restructuring plans so that the debt they are under can be eased out a little. So, their issues can be decreased to some extent.
The concept of a debt restructuring plan or corporate debt restructuring, CDR, was introduced in India in 2001. This concept is based on other countries systems, including the UK, Thailand, Korea, Malaysia, etc.
CDR allows a company with a debt of rupees ten crores or more to restructure. This plan or process is fully voluntary and non-statutory.
The objective of corporate debt restructuring (CDR) or debt restructuring plan is to guarantee an efficient and transparent process for restructuring the business loans of successful companies confronting issues that fall outside BIFR, DRT, and other legal actions benefit all those involved.
Structure of Debt Restructuring Plan or Corporate Restructuring (CDR)
The structure of a Debt Restructuring Plan or Corporate Restructuring (CDR) includes the following crucial and important aspects:
- CDR standing forum and its core group
- CDR empowered group
- CDR cell
Types of Debt Restructuring
Debt restructuring can be of many types. This includes the following:
- Covenant waiver and reset
- Debt rescheduling
- New debt injection
- Refinancing by new lenders
- Break up/ sale of non-core assets
- New equity injection or recapitalisation
- Transfer to a newco
The process of debt restructuring
- Standstill agreements
- Valuations
- Restructuring Options
A standstill agreement is an agreement that is between the borrower and the creditors. This restricts the creditor's enforcement plan.
This standstill agreement is done so that the borrower gets some breathing space and can go forward with the restructuring plan.
This standstill agreement shows the finance documents and will settle the actions necessary to maintain an effective and efficient standstill agreement.
Next is valuations. No business is invaluable. Every business, company and country hold value.
The work they are doing is of utmost importance to them. Their business has been established with so much hard work.
Identifying the borrower's business's strengths, capabilities and potential can help the creditors to work on the debt restructuring plan.
This debt restructuring plan will then thereby help the borrower and creditors both. Creditors will know how to offer the plan, and borrowers will get the plan that they want.
Also, many restructuring plans are available for the borrower and the creditor. At times the borrower may choose the type of restructuring plan they want to opt for.
Or the other way round can be that the creditor themself choose the type of debt restructuring plan they want to offer to the borrower.
This depends on the borrower or the creditor. This can be discussed mutually between the borrower and the creditors.
Benefits of Debt Restructuring
- Helps you save your money.
Debt restructuring can help free up some cash and help you save some money. Of course, when your company is already in debt, you would definitely want to save money. Even a penny would mean so much to you if you could save it. Hence, this debt restructuring plan provides you with the amazing benefit of debt restructuring.
- There are high chances that you can get a reduced rate of interest.
The major purpose of the debt restructuring plan is to get a reduced interest rate. When you have reduced the interest rate, your debt amount decreases, giving you a little breather. Also, this debt restructuring plan then makes things better and much easier for you to deal with.
- This can help you make your finances more organised and flexible in dealing with.
Of course, when your cash is getting saved and you are getting a reduced interest rate, it can help you organise your cash and deal with it easily and more effectively.
In conclusion, debt restructuring is a process that companies and/or countries use to reduce their debt risk, thereby lowering interest rates.
Debt restructuring is done when companies face a lot of financial difficulties, and it is getting very difficult and challenging for them to resolve the issues.
Of course, companies require a lot of resources to build a product which then requires financial resources.
Not always do companies have reliable financial resources to go by, so they borrow money from people out there who may be interested in crediting the cash to the company. This can thereby result in the vicious cycle of debt of companies.
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Conclusion
Getting out of this cycle is important yet challenging. Hence, companies go for debt restructuring plans so that the debt they are under can be eased out a little.
So, their issues can be decreased to some extent. The debt restructuring plan includes Covenant waiver and reset, debt rescheduling, new debt injection, refinancing by new lenders, break up/ sale of non-core assets, new equity injection or recapitalisation, and transfer to a newco.
A debt restructuring plan involves three steps: standstill agreement, valuations, and restructuring options.
If your company is under this vicious cycle of debt and you think this debt restructuring plan can help you ease out a little, then surely go for this plan, or you can contact us for further assistance.
Contact Us for Bookkeeping Services, Outsource Accounting Services, CFO Services, ESOP Services ,Pre Seed Funding Valuation Services in Delhi, Noida, Gurgaon, and all across India: write to us at accounts@especia.co.in. Or Call On :(+91)-9711021268 +91-9310165114
