Are you a director considering a restructure for your company? Corporate restructuring is quite a complicated area and can involve performance improvement, informal restructuring, voluntary administration or even liquidation of some companies within a group.
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The restructuring process need not follow any set formula. In practice, the timing of a restructuring will be dictated by each particular situation. A restructuring is typically considered where a company is underperforming. It will be essential where there is the potential for a viable business but the value of the business has fallen below the amount of debt and the current debt is unserviceable.
You can get a quick overview of the different types of restructurings and the corresponding solutions at The Restructuring Spectrum.
A restructuring can be achieved in a short space of time or it can take years to complete. Some restructurings can be dealt with by a company entirely internally by focusing on performance improvement. That is, it is not necessary to involve external parties such as the company’s bankers or trade creditors. In more serious situations a company will need to approach its creditors and agree some sort of forbearance by the creditors whilst the company deals with its problems. This is often referred to as a “workout“. A workout can involve an informal agreement between the company and its creditors or the company may enter Voluntary Administration to provide a legal structure in which to assess the company’s financial position and agree a restructuring plan. In the most severe cases, it may not be possible to save a company and its operations need to enter either a managed wind down or even immediate liquidation.
Where a restructuring involves creditors, the deal finally agreed between the company and its creditors need not follow a set prescription. In practice, the agreements are often quite imaginative and are designed to suit the specific needs of the situation. The risk and reward considerations revolve around the:
- type of debt instrument taken in exchange for existing debt;
- debt to equity exchange ratio, which will require some sort of valuation;
- proportion of equity dividend to creditors;
- tax treatment of the residual debt and the converted amount.
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