What Is Debt Restructuring and When Is It a Good Option?

Corporate debt restructuring is a process in which a company negotiates with its creditors for modification of outstanding debt terms. For example, it may negotiate to have a portion of a debt forgiven, to reduce interest rates, or to extend the time allowed for repayment. If your company is heading for insolvency and unable to meet its financial obligations, debt restructuring may be the right solution. In certain circumstances, it can help you stay in business, repay your creditors, and avoid bankruptcy. Debt restructuring can be a win-win because lenders and other creditors usually receive more than they would if the company were forced into liquidation or bankruptcy.

What Are the Key Considerations with Restructuring Business Debt?

Debt restructuring may be an important component of financial recovery for your business. Key considerations with restructuring debt out of court include the following:

  • Company liquidity: This is a determining factor in whether or not restructuring is feasible. Sufficient liquidity is needed to allow enough time for proposing, negotiating, and preparing a debt resolution plan out of court.
  • Capital structure: The more complex a company’s capital structure is, the less viable debt restructuring becomes. With more creditors involved, it is more likely that one or more will not agree to the proposal. To be successful, debt restructuring out of court typically requires unanimous approval of all lenders, suppliers, and vendors.
  • Relationship with creditors: Successful debt restructuring outside of bankruptcy requires reaching an agreement with every significant creditor. The better your company’s relationship with lenders, suppliers, and other creditors, the more likely this will occur. Negotiations between a debtor and its creditors constitute a significant aspect of debt restructuring.

What Types of Debt Restructuring Are Available to Businesses?

Companies can employ a variety of techniques to restructure debt outside of bankruptcy. Available options may include:

  • Debt-for-equity swaps: With this technique, a company’s debt to a creditor may be converted into shares of the company. Creditors may agree to forgive all or a portion of outstanding debt for equity in the business. Debt-for-equity swaps may be a good option when a company has significant outstanding debt as well as significant assets, as forcing the business to shut down would be counterproductive. Caution must be taken, as under the terms of such swaps, creditors may take control of the struggling company.
  • Creditors taking a haircut: When seeking to restructure debt, a company may negotiate with lenders or creditors to take a haircut. This means the creditor may write off a portion of the outstanding interest or a portion of the balance on the debt.
  • Debt moratoriums: Payments on a debt may be temporarily suspended by a creditor. Debt moratoriums may be imposed as a response to temporary financial hardship.
  • Callable bonds: A company may issue callable bonds for protection in distressed financial situations when it cannot make interest payments. This type of bond may be redeemed early at a time when interest rates are favorable. Callable bonds allow companies to restructure existing debt by replacing it with new debt at lower interest rates.
  • Income bond: Another option for debt restructuring is issuing of income bonds, which promise only to repay the principal and do not guarantee interest. Interest payments the creditor receives will depend on the earnings of the issuer over a specific time period, as specified in the note.

What Are the Pros and Cons of Debt Restructuring Out of Bankruptcy?

Restructuring debt out of court can have both advantages and disadvantages for businesses. The pros include:

  • Lower costs: Restructuring out of court costs significantly less than Chapter 11 proceedings.
  • Greater flexibility: Debt restructuring outside of bankruptcy makes it possible to negotiate with creditors and propose different strategies for better solutions.
  • Faster debt resolution: While Chapter 11 proceedings can take nine to twelve months, out-of-court restructuring can be completed in six to nine months or less.
  • More privacy: The debt restructuring process can be completed in private without making important financial documents available to the public. Greater privacy means less disruption of business from the public disclosure of financial disputes.
  • Trust demonstration: When creditors agree to proceed with debt restructuring out of court, they demonstrate trust in your business, confidence in the management team, and a belief that your financial issues are temporary and correctable.

In addition to the benefits, out-of-court restructuring has two main disadvantages for financially distressed companies:

  • All substantial creditors must agree unanimously for restructuring to succeed, and
  • Restructuring out of court does not provide Chapter 11 protections against creditor demands or lawsuits.

What Are the Laws Governing Corporate Debt Restructuring Out of Court?

The legal framework for corporate debt restructuring can vary from one jurisdiction to another. On the federal level, the Fair Debt Collection Practices Act is enforced by the Federal Trade Commission. As stated by the Arizona Department of Insurance and Financial Institutions, three sections of the Arizona Revised Statutes form the basis by which financial institutions and enterprises are regulated. These include Title 6 – Banks and Financial Institutions, Title 32 – Professions and Occupations, and Title 44 – Trade and Commerce. In seeking to restructure debts outside of bankruptcy, adhering to all applicable laws and regulations is crucial. Your best action is to consult an experienced Arizona debt resolution lawyer.

Why Choose Us for Debt Restructuring Outside of Bankruptcy?

At Israel & Gerity, our Phoenix business and bankruptcy attorneys are focused on results and your company’s unique needs. We have earned a solid reputation throughout Arizona as a no-nonsense law firm. Our attorneys have experience in debt resolution matters, including bankruptcy, for individuals and businesses. Contact us at 800-659-7575 to schedule a consultation. We can advise you on whether debt restructuring outside of bankruptcy is the best option for your company.