Debt Restructuring: What It Is and How It Works

債務重組 can restructure almost any type of debt, including credit cards, student loans, mortgages, and auto loans. Our restructuring team was part of the legal advisors to the Argentina Creditor Committee in the historic negotiation of Argentina’s sovereign debt. IMF strategy chief Ceyla Pazarbasioglu said Zambia’s debt restructuring was the real test case for the Common Framework, set up in late 2020 by the Group of 20 major economies. The crisis-hit nation becomes the fourth country to apply to the G20 initiative launched in 2020 and designed to streamline debt restructuring efforts in the wake of poorer countries buckling under the fallout from the COVID-19 pandemic.

These creditors generally lend money on concessional terms, meaning that sovereigns pay less interest and have longer repayment periods than they would if borrowing from the private sector. Although the firm Survivor Inc. has positive earnings before interest and taxes, they are not enough to meet its interest payments. When principal payments are considered, cash flow becomes negative, rendering the firm technically insolvent. As a result of the debt restructure, Survivor Inc. is able to continue to operate, but the firm’s lenders now have a controlling interest. Note that the same type of restructuring could take place either voluntarily outside the courts or as a result of reorganizing under the protection of the bankruptcy court. Some companies seek to restructure their debt when they are facing the prospect of bankruptcy.

Debt Restructuring

A householder who cannot service his debt of $200,000 may agree with the bank to reduce the mortgage to 75%, i.e., $150,000, and the bank will receive 60% of the amount of the house’s resale greater than the percentage of 150,000. Therefore, the estimated risk-free rate for Angolan government bonds at that time was 14.38%. Secured or first-lien debt holders were paid from the proceeds of the sale of TerraForm Global Inc. to Brookfield Asset Management.

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Pros and Cons of Debt Restructuring

The activity of these investors, together with high management and board turnover, contributes to significant changes in the governance of distressed firms. The new standard requires the assets or equity interests received or surrendered by the debtor or the creditor are to be measured at fair value. Under the old standard fair value was not used and debt restructuring gains and losses were transferred to the capital reserve. While being famous for its efficiency in other matter, this is not true for debt restructuring.

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In addition, the scope of corporate restructuring is being expanded to include small- and medium-sized enterprises . Creditor banks have evaluated the financial status of approximately 22,000 SMEs with outstanding loans of one billion won or more, and categorized about 13,000 firms as viable. Creditor banks have already determined workout programs for more than 11,800 of these viable SMEs. Given the dire financial position of these highly indebted countries, in 1984, Executive Vice President of the World Wildlife Fund , Thomas E. Lovejoy, proposed the first DNS model.

This is a more affordable method than involving a third-party mediator and can be achieved if both parties involved are keen to reach a feasible agreement. Companies with outstanding bonds can negotiate with its bondholders to offer repayment at a “discounted” level. A debt/equity swap is a transaction in which a company or individual exchanges debt owed for something valuable such as stock; such transactions are often used by entities facing bankruptcy. A company seeking to restructure its debt might also renegotiate with its bondholders to “take a haircut”—meaning that a portion of the outstanding interest payments will be written off or a portion of the balance will not be repaid. Individuals hoping to restructure their debts can hire a debt relief company to help in the negotiations.

A debtor that can obtain funds from sources other than the lender at market interest rates is generally not involved in a troubled debt restructuring. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.

A 20% haircut may reduce its debt by $54 billion, creating an equivalent amount of equity that was good enough to recapitalize the bank. The lenders take a major equity stake and thus dilute the original shareholders, who may own a diminished stake in the company. The Manhattan bankruptcy court judge overruled remaining objections from shareholders as well as two holders of second lien or unsecured debt which had opposed the company’s financing. The judge argued that there was no evidence of bad faith in the negotiation of exit financing.

What is the Paris Club?

Debt for equity deals often occur when large companies run into serious financial trouble, and often result in these companies being taken over by their principal creditors. This is because both the debt and the remaining assets in these companies are so large that there is no advantage for the creditors to drive the company into bankruptcy. As a consequence, the original shareholders’ stake in the company is generally significantly diluted in these deals and may be entirely eliminated, as is typical in a Chapter 11 bankruptcy.

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