The process of reshuffling or reorganizing the financial structure of a business entity, which mainly consist of equity capital and debt capital is called Financial restructuring. At Reorg all your financial requirements are handled by a team of highly qualified professional staff.
Economic conditions or Financial crises forces the companies to adopt strategies leading to financial restructuring. There are two sides of the coin, the assets side, and the liabilities. When companies go through the restructuring process both the assets and liability side are disturbed and if one is changed, accordingly the other has to be adjusted.
The two components of financial restructuring
- Debt Restructuring 2. Equity Restructuring
- Debt Restructuring
Debt restructuring is the practice of reorganizing the debt capital of the company. It involves reshuffling the debt obligations of the company. Debt restructuring is mainly used as a financial tool than compared to equity restructuring. Financial manager needs to tackle the debt obligation aspect of the company to minimize the cost of capital and improve the efficiency of the company which will, in turn, require a constant review of the debt part and managing it to maximize efficiency.
Financial restructuring strategies are applied considering the different situations faced by the company. These can be widely categorized in 3 ways
- A prosperous business opts for debt restructuring to change its debt obligation strategy by making use of the market conditions by swapping the existing high-cost debt with low-cost borrowings.
- A company that is confronting cash flow problems or low debt servicing problems can choose debt restructuring to decrease the cost of borrowing and to enhance the working capital position.
- A company, which is unable to oblige its financial obligations with the resources and assets at its disposal can also go in for restructuring. In short, a bankrupt company can go for restructuring to make it viable in the future.
Essentials of debt restructuring
Restructuring of secured long-term borrowings: The main reason behind choosing the restructuring of long-term debt options for a healthy company is to reduce the cost of capital. Some companies are deeply stuck in the quagmire of Long- term debt, so to improve its net worth and decrease its losses companies go into rehabilitation.
Restructuring of secured working capital borrowings: Companies secure Credit limits, demand loans, overdraft facilities, bill discounting, and commercial paper to increase its working capital All these are liabilities. The restructuring of the secured working capital borrowings is the same as in the case of long-term loans.
Restructuring of other short-term borrowings: Short term loans are not restructured but instead renegotiated with new terms. They mostly include inter-corporate deposits, clean bills, and clean overdrafts.
- Equity Restructuring
Equity restructuring is the reorganizing of equity capital. It is done by a reshuffling of the shareholder’s capital and the stocks that are appearing in the balance sheet. Restructuring of equity and money raised through preference shares becomes a thorny process involving laws and is a very regulated area. Equity restructuring mainly covers the concept of capital reduction.
The capital reduction is the process of cutting a company’s shareholder equity through share annulments and share repurchases, commonly known as share buybacks. The notion behind the reduction of capital is increasing shareholder value and making a more efficient capital structure.
The principal aim of equity restructuring is to deliver sufficient earnings to shareholders and improve investors’ confidence. Equity restructuring is a strategic tool to reduce the cost of capital, write-off losses, and possibly increase the liquidity of stocks.