To avoid bankruptcy, risk of default or sovereign debt, countries, companies (Private or Public), and individuals suffering from cash flow difficulties or financial distress use a fail-safe process so-called “ Debt restructuring”.
The Pandemic Coronavirus, also known as COVID-19 has severely shaken the global economy resulting in huge financial crises and market downfall. The disease has harshly affected the developing economies and businesses along. Corporates are unable to pay their dues or debts causing losses to the creditors or lenders.
In a situation like this, Debt Restructuring is the best and the only hope to cater to odd financial situations.
Debt Restructuring is a process that allows companies to reduce and work out on their debts and to improve their chances of restoring liquidity so that they can seamlessly continue their operations.
1. The process can be carried out by reducing the rate of interest on loans or by postponing the date of the debt payment.
2. It also includes a debt for equity swap which means that - creditors may agree to take over the offered company’s equity and cancel some or all of the debt.
3. The process also involves a “bond haircut” - negotiating to write off a certain portion of interest or capital.
How Debt Restructuring Works
Companies facing debt crises use a Debt restructuring process and it usually is carried out by reducing the rate of interest on the given loans or extending the due date of paying the loan instalment or both. Creditors agree on this as they are aware that if being forced into liquidation, they would receive even less; hence, improving the firm chances of paying back the debts.
Creating A win-win situation!
This way, a business avoids bankruptcy and the lender or creditor received more amount than what they would through liquidation.
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