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Reviewed by Feb 01, 2023| Updated on
Corporate debt restructuring refers to the realignment of a business entity which is under fiscal distress due to its outstanding commitments and obligations and to infuse liquidity into business operations to keep it afloat. This process is generally done by the creditors and the management of the company, which is under distress.
Creditors of corporates are generally banks and non-banking financial companies (NBFCs). The corporate debt restructuring is done by lowering the amount of payable towards the debt. Also, the interest rate is lowered. However, the repayment tenure is enhanced, which would help the company in paying the outstanding dues.
At times, a part of the company’s debt would be waived off by the creditors. But, that would be in exchange for equities of the company. Nevertheless, this kind of arrangement is more favourable for the distressed company as compared to declaring themselves to be bankrupt and undergo tedious procedures.
The requirement for a company to undergo corporate debt restructuring generally arises if a company is going through fiscal difficulties, and is finding it challenging to stand by and fulfil its obligations and fiscal commitments like repayment of a loan.
In simple words, a company owing to higher debt than its potential income. If the companies see that they are going to experience difficulties that may lead them towards bankruptcy, then they may initiate negotiation with their lenders and creditors and decrease their burden and, thereby, avoiding the chances of being bankrupt.
Corporate debt restructuring or business debt restructuring is preferred over bankruptcy. This is because going through the procedure of bankruptcy can be expensive and most small businesses will find it difficult to go through the process and therefore they would prefer to give up some of the stakes in the company to their lenders in the form of equities via corporate debt restructuring.