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What Are the Different Methods of Financial Restructuring?

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  • Written By: Geri Terzo
  • Edited By: A. Joseph
  • Last Modified Date: 09 September 2016
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When a company goes through a financial restructuring, the process typically leads to changes in the debt structure of that entity. The goal is often tied to achieving some financial savings and turning operations around to preserve the future of that business. A business might be able to initiate a financial restructuring out of court, or the process might require the involvement of the legal system to satisfy creditors. Some of the proven ways to perform a financial restructuring include reorganizing the terms of debt obligations with creditors, restructuring equity and obtaining loans.

Quite possibly, a corporate restructuring could lead to a bankruptcy filing, which does not have to translate into the end of a business. A bankruptcy can often serve as a means to protect a business from creditors for a period of time while a debtor attempts to increase profits. In a prepackaged bankruptcy deal, a filer can save months of time in the process. Before making a formal filing in a bankruptcy court, a debtor and creditors agree to refinancing terms in some formal arrangement before a judge even views the case. By the time the filing is made, the creditor has already saved the court the trouble of coming up with some agreeable terms with creditors because of the prepackaged deal.

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It might be possible to continue operations even as the bankruptcy process unfolds, as long as there are enough financial resources to do so. Bankruptcy is often designed to keep a business running even as debt terms are renegotiated. If the case is not a prepackaged bankruptcy, the judge might appoint a trustee to negotiate with creditors throughout this financial restructuring. This gives the company an opportunity to return to profitability. If successful, the company might emerge from the bankruptcy after a period of time.

Companies that are pursuing a financial restructuring might be able to obtain loans to help with the process. Debtor in possession (DIP) financing is a loan that is extended to businesses that are facing financial hardship. A DIP loan might be granted to a company that is already undergoing the bankruptcy process to assist with those expenses. The borrowing costs for DIP financing could be high because of the risk taken on by the lender, but it also could help prevent a company from needing to close its doors. Providers of DIP financing might have a hand in the troubled company's operations throughout the life of the financing and might expect the borrower to set and reach certain financial goals, leading to a turnaround of that business.

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