IB-PS-Ch.14. Financial Restructuring Advisory - PTR

Debt Restructuring is part of the restructuring of a balance sheet as it is related to the borrowing obligation of a company

Debt Restructuring is a much more routine process (than Equity restructuring) and can be Triggered off even as a financial management tools to increase the efficiency of borrowing and reduction of financing costs.

Need:

A healthy company wants to restructure its debt portfolio by substituting existing high cost debt with fresh low cost borrowing

A Company without servicing capacity and liquidity problem would want to restructure its debt portfolio to reduce the cost of borrowing and improve working capital position

A company that is insolvent would need a wholesale restructuring of its debt portfolio to Rehabilitate it and make it solvent.

Isssues in Restructuring Various Types of Debt

Broad categories of debt


Secured long term borrowings

Unsecured long term borrowings

Secured working capital borrowings

Other short term borrowings


Restructuring of Secured long term borrowings

Long term secured borrowing can be either in the form of mortgage backed loans provided by commercial bank and financial bank.
Long term borrowing can be both rupee denominated or In foreign currency from Indian lending agencies.
The need for restructuring long term secured borrowing
To Reduce the cost of capital.
TO improve Liquidity and cash flow for a potentially sick company
To Enable rehabilitation of a sick.
Reducing cost of Capital for healthy companies
Restructuring Debt obligations for companies facing bankruptcy or for potential sick units
Recovery laws and restructuring of secured long term borrowings



Restructuring of Unsecured long term borrowings

It can be in the nature of public deposits, private Unsecured loans and privately placed, unsecured debenture bonds or debenture.

For unlisted non-financial companies, the appropriate is the Department of company Affair set up under the ministry of Finance

For listed companies, non-financial companies, the appropriate is the SEBI.


Restructuring of Secured working capital borrowings

Working capital borrowing encompasses credit Limits from Commercial banks in the nature of credit, demand loan, bill discounting, overdraft facilities and commercial paper

These are first charge on inventory and book debts and second charge on other assets.

For other short term borrowing which include inter corporate deposits, clean bills, other acceptance and clean overdraft are generally not restructured. It is rolled over with fresh terms.





Restructuring of other short term borrowings

IB Role

The first step would be to formulate a viability plan for the company

The next step would be to float the “Debt restructuring scheme”.

The next step is to present the DBS to lenders and represent the client in discussion and negotiations with the consortium of lenders..

After the proposal DRS is approved in principle, it is to be ratified by the approving authorities in each lender’s organization.

Debt restructuring services involves a lot of compliance and legal work.