what it is ? Corporate debt restructuring

Livemint:Vivina Vishwanathan: Apr 3 2012. 9:44 PM IST


Debt restructuring happens when a company goes through financial distress and is unable to meet its loan repayment obligation to multiple institutions

Recently, companies such as Bharati Shipyard Ltd, GTL Ltd, Hindustan Construction Co. Ltd, Air India and Kingfisher Airlines have either sought approval from their company boards for corporate debt restructuring (CDR) or have already restructured their debt.

Why is it done?

Debt restructuring happens when a company goes through financial distress and is unable to meet its loan repayment obligation to multiple institutions. To avoid default on existing debt, the company uses debt restructuring.

What is corporate debt restructuring?

Companies take loans for their daily operations and capital expenditures. A bulk of this debt comes from banks and similar financial institutions—called the creditors. Sometimes promoters also lend to the company; this lending is in addition to the equity capital they already hold in the company.

In the event that a company’s cash flows are suffering, sometimes a lender or a creditor agrees to restructure a company’s outstanding financial obligations.

CDR is a mechanism evolved by Reserve Bank of India to help a company banking with multiple institutions under consortium arrangement. Through CDR, the multiple banks and financial institutions are given surety on repayment to a certain extent.

How is debt restructured?

This is usually done to reduce the debt burden on the company either by decreasing the interest rates it has to pay or by extending the repayment period of loans or both. It helps the company to increase its ability to meet the obligations.

In some cases, the debt may be exchanged for an equity position in the company. A debt moratorium is another option. Here, the company gets a relief for a certain period before starting the repayment of debt. For instance, Bharati Shipyard has secured a debt moratorium, so its new debt repayment schedule would begin only after 18 months.

What it means

A breather in repayment of loans is not only favourable for the company but also means that lenders will see lesser non-performing asset (NPAs). When an asset or loan stops generating regular cash flow, they are known as NPAs. CDR acts as a shock absorber for banks where, though delayed, the chances of part payment by the company increases which is better than no payment at all.

CDR helps a company clean debt from its balance sheet. Hence, if you are invested in a debt laden company, a debt restructuring will reflect well for its stock price as the financial health of the company may improve.