by

Arihant Bhandawat

DEBT RESTRUCTURING

Debt Restructuring involves the process whereby organizations – both private and public that are facing financial duress are allowed renegotiate their financial loans and debts schemes with financial companies, so that they have better structure to pay the debts. This is aimed at providing liquidity and rehabilitation mechanism in the operations of the company in question.

It is seen that during any financial or economical meltdown, companies who have a highly leveraged balance sheet, are normally the first to start the default in the payment of interest and principal or both. Such a situation normally arises as the companies lose cash from operations and may be running negative cash flow balances. Ultimately, to avoid the risk of the whole debt being termed as bad, financial companies, allow such companies to renegotiate the loan terms and conditions.

WAYS OF ACHIEVING FINANCIAL RESTRUCTURING

The most likely manner in which restructuring is implemented has been enumerated as follows:

·         MORATORIUM PERIOD - Moratorium period for payment of interest and principal repayment or both. This gives the company crucial time period to get back to its feet.

·         TIME PERIOD - Extension for time period for payment of the loan.

·         INTEREST RATE - Reduction of the interest rate.

·         DEBT-EQUITY SWAP - Conversion of debt into equity either wholly or partly.

·         INTRODUCTION OF CAPITAL - Infusion of capital from the promoters which is then backed by further loans by financial companies so that the operations of the company can be brought back to its ideal state.

WAY FORWARD FOR INDIAN BANKING AND FINANCIAL INSTITUTIONS

It is a win-win situation for both the debt-laden company and financial lender as both are able to salvage their investments from the financial instability they might be facing. During the last year ending 31^st December, 2012, over 100 companies had applied for restructuring and the collective amount for restructuring had crossed the figure of over 2 trillion Indian rupees.  

This humongous figure is expected to increase if the financial and economic meltdown that precipitated from sub-prime crisis of America and sovereign-debt crisis of Europe does not end soon.