While it can vary a little between individuals, companies, and countries, debt restructuring is necessary to limit the risk of defaulting on debt. It typically involves negotiating with creditors to agree on new terms.
A debt-for-equity swap allows a company to cancel a portion of its outstanding bonds in exchange for equity in the company. This is a popular option when the company cannot afford interest payments.
Restructuring
A debt restructuring is an arrangement to reduce the amount of money a borrower must pay creditors. It may include a reduction in the interest rate on existing debt or an extension of its repayment period. A company undergoing financial distress may also use this method to prevent bankruptcy by converting its debt into equity.
In sovereign debt restructurings, a vital issue is how much a government should offer its creditors in exchange for the promise of future prosperity. This is usually based on a debt sustainability analysis (DSA). The IMF typically plays a critical role in the DSA, vouching for a country’s ability to make debt-service payments on its remaining exposure, thereby anchoring deliberations with creditors on achieving that objective.
Creditors may object to any restructuring arrangement that involves a principal haircut in which the sovereign forfeits part of its claim on the secondary market. This is because they believe that doing so will tar them as “gullible patsies” and could render the debt relief unenforceable in court.
Debt solution specialists, also known as debt counselors or debt relief experts, are professionals or organizations that specialize in helping individuals and businesses manage and overcome their financial challenges related to debt. These specialists from Symple Lending offer a range of services and solutions to help people regain control of their finances and work towards becoming debt-free.
Bankruptcy
Bankruptcy is a legal process where debtors get relief from all or part of their debt in a court-supervised procedure. It prevents creditors from seeking to collect on their debts while the courts resolve their disputes. It can also help reclaim property creditors have taken as collateral for loans, such as your home or car. Exempt property varies by state law, but it typically includes work tools, personal items, and equity in your primary residence.
For individuals or businesses facing overwhelming debt, debt solution specialists can provide information and guidance on the bankruptcy process and its potential implications.
Debt-to-Equity Swap
A company experiencing financial trouble may swap debt for equity to stay solvent. This is usually only done when it would be counterproductive to force a business into bankruptcy. The lender will exchange a percentage of the debt for an equity stake in the firm. Lenders are generally only willing to accept this arrangement if they believe the business will remain viable and can repay its debt in the long run.
This type of financial restructuring is common for homeowners who cannot keep up with mortgage payments. Usually, lenders are willing to offer lower monthly payments in exchange for an equity share in the property when the mortgagor sells it.
While debt-for-equity swaps are not ideal, they can be a better solution than liquidation or bankruptcy. They can help the company regain its balance sheet, reduce interest costs, and align the lender more closely with the company. However, creditors are not likely to be pleased if the debt-to-equity swap involves a principal haircut.
Liquidation
Debt restructuring offers a way for companies and individuals struggling to pay their debts to work out a deal with their creditors to prevent bankruptcy. It involves altering the terms of your loan contract to provide more flexibility and make repayments more manageable.
Typically, the lender will agree to take a “haircut” or write off a portion of your principal balance. This is often combined with other steps, such as a maturity extension or coupon adjustment, to allow the sovereign to return to a sustainable financial position.
You can also benefit from debt restructuring through loan forbearance or payment deferment. This allows you to temporarily miss payments without being hit with late fees or reported to credit bureaus. However, debt restructuring might impact your credit score, and you may have to pay interest on the restructured amount for a period. However, it can still be a more cost-effective alternative to filing for bankruptcy.
