Measures taken to drastically alter the financial and operational outlook of the company are called Financial Restructuring, mostly done when the business is going through a financial crisis.
At “Reorg” we advise companies to take measures that involve sizably adjusting the debt, operations, or structure of a company in such a way as to curb financial cost and improve the business activity.
When a company is in dire straits having trouble fulfilling financial commitments on its debt, it will often consolidate its smaller entities into one and negotiate the terms of the debt to pay off lenders.
A company restructures its operations or structure by cutting costs, such as layoffs, or downsize through the sale of assets.
The two components of Financial Restructuring
1) Debt Restructuring
Debt Restructuring is a short-term answer to reducing your financial burdens. You must analyze and pinpoint the cause of financial weaknesses and try to rectify them. The business must overhaul spending habits to prevent itself from again landing in the same default position.
The financial manager of the company must evaluate which form of debt restructuring is best for the company. They must keep track of the company’s credit records because it has great impacts on future borrowings. Defaulting on a loan has serious consequences on credit score.
Debt restructuring is done according to the financial circumstances facing the company. A few flagging situations that demand a restructuring of your loan.
A prosperous company can opt for debt restructuring to decrease its debt share can avail the market conditions by swapping the current high-cost debt with low-cost borrowings.
A company that is having liquidity crunch or debt servicing capacity problems can benefit from debt restructuring to reduce the cost of borrowing money and to enhance the working capital position.
An insolvent company which is unable to fulfill its financial obligations can go for financial restructuring.
Restructuring of secured long-term borrowings can be availed by a prosperous company when it needs to reduce the cost of capital, and by a distressed company to enhance liquidity and increase cash flows.
Restructuring of the long-term unsecured borrowings depends on the type of borrowing. Borrowings can be public deposits, private loans (unsecured), and privately placed, unsecured bonds or debentures. The terms of deposit for public deposits can be negotiated only if the scheme is ratified by the right authority.
The restructuring of the secured working capital borrowings is the same as in term loans. Credit limits from commercial banks, demand loans, OD facilities, are under the working capital borrowings.
The borrowing that is very short term is generally not restructured. These can certainly be renegotiated with new terms.
2) Equity Restructuring
Equity restructuring is the process of rearranging the equity capital. It includes the reshuffling of the shareholder’s capital and the reserves appearing in the balance sheet. Restructuring of equity and preference capital becomes a complicated process involving a process of law and is a highly regulated area. Equity restructuring is mainly concerned with the notion of capital reduction.
Methods of equity restructuring
- Restructuring of the share capital through repurchasing the shares from the shareholders for cash. This process reduces the liability of the company to its shareholders, returning the share capital results in capital reduction.
- Restructuring of equity share capitalis also done by writing down the share capital by proper accounting entries. This reduces the sum payable by the company to its shareholders without actually returning equity capital in cash.
- Restructuring is also be done by decreasing or forgoing the dues that the shareholders need to pay.
- Restructuring can also be done by the sub-division of the shares. Sub-division of share capital is a process by which a company restricted by shares changes the make-up of its share capital by enhancing the number of shares it has an issue with and decreasing the nominal value of each share. On a sub-division, the aggregate nominal value of the company’s issued share capital remains unchanged.
The process of restructuring can be a stormy, painful process as the internal and external structure of a company is revamped and jobs are cut. But once the process is over, restructuring results in well-organized, more economically viable business operations. After workers adjust to the new set up, the company is better prepared for realizing its goals through greater efficiency in production.