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What is Restructuring?

Restructuring is a company’s strategic plan to repay debts without needing to file for bankruptcy protection. If this sounds like a solution you may need but don’t know where to start, this post should help you out! We’ll discuss how restructuring can be seen as an opportunity by each stakeholder and why it’s important. We’ll also briefly touch on related topics like distressed debt investing and techniques available to creditors who are owed money by the company who needs restructuring (such as forbearance agreements).

First, it’s important to understand the situation a company who needs restructuring may be facing. This is because restructuring affects each stakeholder in a corporation in different ways. So, if you’re a creditor owed money by a company who’s considering restructuring or you’d like to invest in distressed debt, understanding the situation of the company you may be receiving less money from should aid you in making your decision. As such, I’ll begin by giving an overview of the corporation who needs restructuring and the options available to creditors that face repayment delays. Then I’ll get into how restructuring affects different stakeholders and what options they have available for receiving their funds back.

Overview of the corporation – What is it?

When a company is in need of restructuring, they are unable to cover their debts that are due. Most commonly, this occurs when the company has less cash flow that they need to pay their long-term debt or interest rates increase. This occurs because creditors charge the company more interest when the market interest rate rises. When this occurs, repaying all of your outstanding debt can become difficult and if not addressed, will lead to more drastic measures such as bankruptcy protection.

Options for creditors – What do you do?

When a corporation appears to be in trouble with their finances and will be slow in repaying creditors, restructuring may occur. In the case where a company is unable to repay creditors, creditors will likely have two options:

1) Sit on their money and see what happens. This causes other companies to pile into the same situation, making their situation even more difficult if they need restructuring. The problem is, a lot of times these companies will be holding a lot of money for a long time and may have lost value in their investment over this time frame.

2) File for bankruptcy protection. This allows creditors to seize all assets from the creditor, call debts due immediately and get paid back by the sale of the company’s assets in order to repurchase them under bankruptcy protection.

The most common scenario is where a company files for Chapter 11 bankruptcy protection. This means the company has filed the papers with the court and has an agreement with their creditors to restructure and allow them to pay back the debts owed.

Restructuring options for creditors – What options are available?

When a creditor files for restructuring, they become a preferred creditor or “straw holder”. It’s important to note that not all of these options will be available to creditors and it may be best to seek legal advice before taking action or you’ll find yourself in hot water (pun intended). The options for restructuring tend to vary by creditor; however, the following are available to most creditors.

1) Accept the repayment terms offered by corporate restructuring. This is where you agree with corporate restructuring to take less money, but be paid within the same time frame as was originally agreed upon. This can be seen as an opportunity because you will not lose any of your investment (and possibly gain more if the company’s asset values increase). However, if creditors accept these terms and other creditors don’t, your position could increase greatly in comparison with other creditors that did not accept this option.

2) Extend the repayment period. This is where creditors can agree to a repayment period that is longer than originally required. The interest rate will likely increase as a result, but this option allows creditors to avoid becoming a “junior creditor” which occurs when the restructuring ends and creditors have not been repaid their funds.

3) File for bankruptcy protection so your position as a creditor does not change as a result of restructuring. In addition to filing as a creditor, you may decide to take on an equity stake in the company after its restructuring has concluded. By doing this, you no longer have to worry about your funds being repaid and will receive returns from the company’s profits after the restructuring is complete.

4) Refuse to accept the new repayment terms. This is when you cannot agree with corporate restructuring to take less money, but you’re likely to receive it in the end anyways. If you refuse to accept these terms, your position will not change.

Restructuring options for creditors – What about my creditors?

If there are other creditors who do not agree with the restructuring of the company in which they hold debt, they’ll become “junior creditors”. This means they’ll pay more than their original amount in order to be repaid by assets acquired in the restructure or through sales after corporate restructuring is completed. This is because they are afraid that their funds will not be paid back.

5) Accept the restructuring. This is where your position as a creditor does not change regardless of what you do because of restructuring. However, if creditors agree to restructure, their position may only increase in comparison with other creditors who didn’t accept this option. This means these creditors will have less of their original investment after restructuring is complete if they agreed to accept the new repayment terms being offered by the company.

6) File for bankruptcy protection before restructuring takes place can still occur. By doing this, creditors will be paid out of the company after restructuring has taken place. However, if this bankruptcy protection occurs before restructuring is completed, all of your debt holders get paid first and it may be difficult to recover any funds for you.

7) File for bankruptcy protection after the restructuring takes place. If this occurs, your debt can still be repaid in order to get your capital back if the company is liquidated or sold by the creditors once corporate restructuring has concluded.

The Bottom Line – What’s my best option?

The decision to restructure rests with the creditor who receives less than they were initially supposed to receive or where they believe that their position will not change regardless of what they do. When faced with this decision, creditors need to evaluate the possibilities and determine what’s best for their investment. This will vary depending on the particular circumstances at hand, such as whether you’re financing a start-up or it’s a well-established company that is experiencing financial difficulties.

How does restructuring affect me as a creditor?

If restructuring occurs, you’ll likely receive less than if it had not occurred because you’ll have to take a reduced amount of debt. If creditors refused to accept this offer and went through restructure anyway, they may have received more, but they’ll have less equity in the restructured company once it has been liquidated or sold. However, it can be best to negotiate with your debt holder before restructuring takes place if possible. This way you can ensure that the debt holder will not go through restructuring unless you agree with the terms involved.

What are the best options for creditors?

The best options for creditors are those which give investors more of their original investment back. This means that restructure is not typically on the table as a good option unless agreeing to the company’s repayment terms is better than serving as a junior creditor. In addition to this, creditors can improve their chances of being repaid by either financing a startup or purchasing credit from other companies who have been forced into bankruptcy protection or have been forced into corporate restructuring. This way, they become “subordinated debt holders” which means they do not have to worry about having their funds repaid and can enjoy the benefits and funds from the company after restructuring has taken place.

What happens if there is no restructuring?

While restructuring is not always on the table as a poor option, it’s important for creditors to learn about what will happen if there’s no restructure or restructuring agreement. In this case, you’ll be ensured that your balance will be paid out out of the company’s assets once it has been liquidated or sold by its creditors. This includes your interest rate as well as any payments that may have been missed because of the company’s financial difficulties.

How do I find my best possible restructuring option?

In order to ensure that you meet your own personal goals as a creditor, it’s important to speak with a lawyer before restructure occurs. This way, the creditor can be sure they’ll meet their own personal goals and can work with their debt holder to ensure they’ll receive returns without being a junior creditor if restructuring does occur. This will allow the creditor to have input on how restructuring will take place before it occurs so they can have more of their original investment returned.

What happens if restructuring is not conducted?

If restructuring is not conducted, creditors can still be paid out of the company’s assets once a liquidation occurs or a sale takes place. This process works by converting debt into equity so that creditors can recover their assets with interest. However, this typically results in creditors receiving less of their original investment back as it does not involve trying to renegotiate repayment terms from the company. In addition to this, restructuring typically allows creditors to ensure that they’ll receive more of their original investment back because negotiations take place before the agreement is made and finalized with corporate restructuring.

Restructuring is a double edged sword and needs to be handled with a great deal of knowledge and foresight. It is important to note that while restructuring may present some temporary reprieve from debt pressures, it is not a let off and the debt obligation still has to be paid off in future. Sometimes, business are left even worse off than they were at first due to uninformed and untactful negotiations. The importance of sound financial advice from expert Debt Financing and Structured Financing Consultants cannot be overemphasized.

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Frequently asked questions

Most frequent questions and answers

What clients usually engage your Restructuring Consultants?

We work with clients from all over the world. Our clients range from enterprise and corporate clients to companies that are backed by Private Equity or Venture Capital funds. Furthermore, we work directly with Family Offices, Private Equity firms, and Asset Managers. Most of our enterprise clients have dedicated Corporate Development, M&A, and Strategy divisions which are utilizing our pool of Restructuring talent to add on-demand and flexible resources, expertise, or staff to their in-house team.

How is Fintalent different?

Fintalent is not a staffing agency. We are a community of best-in-class Restructuring professionals, highly specialized within their domains. We have streamlined the process of engaging the best Restructuring talent and are able to provide clients with Restructuring professionals within 48 hours of first engaging them. We believe that our platform provides more value for Corporates, Ventures, Private Equity and Venture Capital firms, and Family Offices.

Our Hiring Process – What do ‘Community-Approach’ and ‘Invite-to-Apply’ mean?

‘Invite-to-Apply’ is the process by which we shortlist candidates for the majority of projects on our platform. Often, due to the confidential nature of our clients’ projects, we do not release projects to our whole platform but using the matching technology and expertise of our internal team we select candidates who are the best fit for our clients’ needs. This approach also ensures engagement with our community of professionals on the Fintalent platform, and is a benefit both to our clients and independent professionals, as our freelancers have direct access to the roles best suited to their skills and are more likely to take an interest in a project if they have been sought out directly. In addition, if a member of our community is unavailable for a project but knows someone whose skill set perfectly fits the brief, they are able to invite them to apply for the role, utilizing the personal networks of each talent on our platform.

Which skills and expertise do your Fintalents have?

The Fintalents are hand-picked and vetted Restructuring professionals, speak over 55 languages, and have professional experience in all geographical markets. Our Restructuring consultants’ experience ranges from 3+ years as analysts at top investment banks and Strategy consultancies, to later career C-level executives. The average working experience is 6.9 years and 80% of all Fintalents range from 3-12 years into their careers.

Our Restructuring consultants have experience in leading firms as well as interfacing with clients and wider corporate structures and management. What makes our Restructuring talent pool stand out is the fact that they have technical backgrounds in over 2,900 industries.

How does the screening and onboarding of your Restructuring talent work?

Fintalent.io is an invite-only platform and we believe in the power of referrals and a closed-loop community. Members of our community are able to invite a small number of professionals onto the platform. In addition, our team actively scouts for the best talent who have experience in investment banking or have worked at a global top management consultancy. All of our community-referred talent and scouted talent are subject to a rigorous screening process. As such, over the last 18 months totaling more than 750 hours of onboarding calls, of which only 40% have received an invite-link after the call.

What happens if I am not satisfied with my Restructuring consultant’s work?

During your initial engagement with a member of our Fintalent talent pool with no risk. If you are not satisfied with the quality of your hire for any reason then we are able to find a replacement at short notice. There is no minimum commitment per project, but generally projects last at least 5 days and can last 12+ months.

Interested in our invite-only community of tier-1 Restructuring experts?

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