Debt Restructuring - Method for Increasing Liquidity

What is Debt Restructuring

Debt restructuring is when a company is facing liquidity issues and attempts to negotiate with its creditors to change the terms of the loans in order to continue business operations.  Debt restructuring is always a better option for a company because it allows them to stay in business without having to go through the legal woes of a bankruptcy.

Goal of Debt Restructuring

The goal of a debt restructuring is to not write off a company's debt, but rather lower the interest payments and extend the terms of the loan in order to get through a rough patch.  Companies attempting to go through a debt restructuring must first prove that their current market environment will ultimately past and the company will be able to resume profitability.  This is what makes debt restructuring deals challenging, because companies have to convince their creditors, bankers, and distributors that the company will be able to make good on the new finance arrangements within a specified period of time.

Debt Restructuring vs. Bankruptcy

Bankruptcy should always be a last option for any business.  This is because bankruptcy proceedings cost between $50,000 and $100,000 for even small businesses.  This cost goes on top of the already heavy burdens the company is experiencing.  In addition, a more sobering statistic is that only 20% of companies are able to eventually work themselves out of bankruptcy. 

Debt restructuring does not tarnish a company's credit worthiness, so the company is able to still receive financing to make payroll, purchase supplies and even expand the business in more profitable areas.  This of course increases the odds of the company to make money over the short and long-term.

Real Life Example of Debt Restructuring

As a result of the credit crisis of 2008, the 3 major U.S. automakers were in desperate need to secure financing in order to continue their operations.  Many lawmakers and business experts were tossing around the idea of bankruptcy.  This is because if the companies were to enter into bankruptcy it would force the automakers to shutdown a number of plants, slash benefits and pension plans.  This ripple affect would cause potentially double digit unemployment rates in certain parts of the country.  President Obama stated that this is not an option, but rather the automakers will have to,  "What we have to do is to provide them with assistance but that assistance is conditioned on them making significant adjustments.  They are going to have to restructure and all of their stakeholders are going to have to restructure."
Tim Ord
Ord Oracle

Tim Ord is a technical analyst and expert in the theories of chart analysis using price, volume, and a host of proprietary indicators as a guide...
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