What is a Debt Restructuring?

A debt restructuring is a process by which a firm unable to pay its debts in a timely manner makes alternative payment arrangements with its creditors. This process may allow the company to continue in operation, rather than entering bankruptcy proceedings and liquidating. A debt restructuring may involve any of the following:

Delaying debt payments
Forgiving some portion of the debt
Swapping some or all of the debt for shares of the firm’s common stock or preferred stock

A financially healthy firm can also engage in a debt restructuring by calling its debt prior to the normal maturity date, usually in order to take advantage of lower market interest rates with a replacement debt issuance.

Advantages of a Debt Restructuring

The main advantage of a debt restructuring is that the resulting debt level is reduced to one that is more sustainable for the borrower. At the revised debt level, it is presumed that the borrower now has sufficient cash flows to make the debt payments associated with the revised repayment plan. This allows the lender to avoid having to recognize a complete write-off of the debt, though it may have to write off a smaller amount to get the debt level down to a point at which the borrower can repay it.