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What is Corporate Debt Restructuring

Corporate debt restructuring is the reschedulement or reorganization of a company’s outstanding debt obligations to increase its ability to repay the obligations on time. Corporates raise money in different ways. But the most important of these are through equity and debt.

Equity

For equity portion, corporates approach stock markets, institutions or other entities like Private Equity for investment in the company in exchange for a share stake. There is no cost involved in this except for initial costs of raising the money.  Corporates do not face any obligations to repay the money.

Corporate Debt

Companies also raise money through banks and financial institutions to meet their capital expenditure and working capital related expenses. In this case, companies need not give any shareholding but give other comforts like assets available with company and promoters. Companies have to pay timely interest as well as principal amount in due course and completely pay all the loan expenses to come out of obligations with banks.

Why Corporate Debt Restructuring

There are occasions when corporates find themselves in financial difficulties because of factors beyond their control like global economic slowdown, industry specific negative cycle and also due to certain internal reasons. As a result, companies wont be able to pay the interest and principal on time resulting in losses to banks over a period. For the revival of such corporates as well as for the safety of the money lent by the banks and financial institutions, timely support through restructuring of genuine cases is insisted on.

What is Corporate Debt Restructuring (CDR)

Corporate Debt Restructuring is a mechanism where all the lenders to concerned corporate come together and form a forum. Lenders see the company’s business model and try to assess the nature of the problems faced by the company i.e., temporary or permanent. They also take the help of specialists to help them assess the company’s industry and how the company is positioned. Post analysis of all these, banks decide whether company’s business model is viable. If banks are satisfied, they restructure the corporate debt lent to the company either by re-scheduling the payments or reducing the interest rates so that company gets a breathing space. Banks may also consider giving a top up/additional loan for stabilizing the operations of the company. All these activities form part of CDR. At the end of the day, Banks are more worried about recoverability of the loans and adopts legal means to help the genuine companies. This is the essence of CDR.
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