Debt Restructuring

11 Key excerpts on "Debt Restructuring"

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  Managing Financial Crises : Recent Experience and Lessons for Latin America

  • G. Kincaid, and Charles Collyns(Authors)
  • 2003(Publication Date)
  • INTERNATIONAL MONETARY FUND

    (Publisher)

  VII Corporate Debt Restructuring in the Wake of Economic Crisis Sean Hagan, Eliot Kalter, and Rhoda Weeks-Brown Financial crises frequently result in considerable financial and corporate sector distress, requiring a broad policy response that includes a corporate Debt Restructuring strategy. The immediate objectives of this strategy should be to provide an orderly and efficient mechanism for separating viable from non-viable firms while providing equitable burden sharing. In recent years, three broad approaches have been used to meet these objectives. One involves across-the-board, direct government involvement that determines the extent, method, and distribution of burden sharing among relevant parties. An alternative is a market-based, case-by-case approach in which decisions are left to private sector debtors and creditors within the context of a well-regulated legal system that facilitates consensual restructuring agreements. On balance, experience points to the benefits of a hybrid of these two approaches, involving a comprehensive, coordinated restructuring approach based on market incentives while the government works toward an equitable sharing of limited fiscal resources. An economic crisis involving major shifts in relative prices, serious disruptions in the availability of financing, and a deep downturn in economic activity will cause widespread damage across the corporate sector. This section 1 discusses different approaches to the possible need, in these circumstances, for a restructuring of corporate debt, drawing on a growing body of work in this area. It also reviews relevant country experience, focusing on the underlying factors that led to different country approaches to corporate restructuring, and presents lessons that can be drawn from these experiences

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  Leading Corporate Turnaround

  How Leaders Fix Troubled Companies

  • Stuart Slatter, David Lovett, Laura Barlow, David Lovett, Laura Barlow, David Lovett, Laura Barlow(Authors)
  • 2023(Publication Date)
  • Wiley

    (Publisher)

  10

  Financial Restructuring

  IT IS CLEAR THAT EVEN IF THE TURNAROUND LEADER CAN BLEND all the other key ingredients of a successful turnaround but the business is left unable to service its capital structure, all that effort will have been for nothing since covenant and other loan document breaches will soon recur. The financial structure of the company must invariably be renegotiated to align it to the needs and capacity of the new business that arises from implementation of the other key ingredients. A financial restructuring normally becomes necessary in companies where, consequential to many factors, the financial stakeholders’ risk/reward balance has been distorted or broken. We say normally because in the case where investors acquire discounted debt with the intention of benefiting from an upcoming restructuring, they may actively precipitate a restructuring in order to maximize their returns.

   

  The objectives of a financial restructuring are threefold:1. To establish a stable capital structure, commensurate with the enterprise value and cash-generating capacity of the revitalised business

  2. To ensure that the new capital structure reflects correctly the economic interests of those stakeholders who will support the company through its turnaround and does so on the basis of a balance that is satisfactory to themselves, other stakeholders and the company. The new structure will rarely be the same as existed at the time of the initial participation or investment, but will reflect the additional perceived and sometimes actual risk that exists in the relationship.

  3. To restore the risk profile (particularly in relation to credit extended to the company) to that accepted at the time of making the original credit available, subject to the requirements of the first two objectives. This is normally measured in terms of leverage and other financial ratios, asset coverage and other covenanted performance criteria.

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  The Executive Guide to Corporate Restructuring

  • Francisco J. López López Lubián(Author)
  • 2014(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  51 4 Financial Restructuring 4.1 Chapter overview Any company dealing with a corporate restructuring process has a lot of problems. To solve them it’s necessary to understand their nature and causes. Most problems in a company come from the operating aspects, not from the financial ones. Consequently, before trying to set up a permanent financial solution for a company, we need to understand why the company is not generating enough cash and we have to conceive a realistic and doable business plan to address the critical issues. In other words, before trying to finance an operational problem, try to solve it. Financing operating inef- ficiencies is the best way to end in financial distress. Financial leverage properly managed is a way to generate economic profit- ability in a company. Good management entails maintaining the level of debt within certain limits. In this context, one necessary step in any finan- cial restructuring is to determine the debt capacity of the company. When a company is involved in a corporate restructuring, to determine the debt capacity of that company we need to have reference to the optimal capital structure the company should have. Having decided the amount of debt and the capital structure associated with the financial restructuring, an additional important point is to select the type of debt to be used. 4.2 Introduction Any company dealing with a corporate restructuring process faces a lot of problems. To resolve them it’s necessary to understand their nature and 52 The Executive Guide to Corporate Restructuring causes. Most problems in a company originate in the operating side of the firm, not in the financial. Consequently, before settling on a permanent financial solution, we must understand why the company is not able to generate enough cash, and we have to conceive a realistic and feasible busi- ness plan that addresses the critical issues. In other words, before trying to finance an operational problem, let’s try solving it.

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  Out-of-Court Debt Restructuring

  • Jose M. Garrido(Author)
  • 2012(Publication Date)
  • World Bank

    (Publisher)

  1 S E C T I O N 1 Background to Out-of- Court Debt Restructuring 1. Introduction 1. Definition of out-of-court Debt Restructuring. Out-of-court Debt Restructuring involves changing the composition and/or structure of assets and liabilities of debtors in financial difficulty, without resorting to a full judicial intervention, and with the ob- jective of promoting efficiency, restoring growth, and minimizing the costs associat- ed with the debtor’s financial difficulties. Restructuring activities can include mea- sures that restructure the debtor’s business (operational restructuring), and measures that restructure the debtor’s finances (financial restructuring). Out-of-court debt re- structuring performs an important role in all insolvency systems. In numerous situ- ations of financial difficulty, the debtor and the creditors can protect their respective interests more effectively if an informal solution is implemented. Throughout this document, the terms “out-of-court restructuring” and “workout” will be used as synonyms and refer to purely contractual agreements between the debtor and its creditors that restructure the debtor’s liabilities and, possibly, also its business ac- tivities. Enhanced restructurings are purely contractual workouts that are enhanced by the existence of norms or other types of contractual or statutory arrangements. Finally, out-of-court Debt Restructuring can also comprise procedures involving public authorities or even the courts: the expression “hybrid procedures” refers to all procedures where the involvement of the judiciary or other authorities is an integral part of the procedure, but is less intensive than in formal insolvency proceedings. Purely contractual restructurings, enhanced restructurings and hybrid procedures represent, in numerous situations, an efficient alternative or a useful complement to purely formal insolvency proceedings.

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  Sovereign Debt and the Financial Crisis

  Will This Time Be Different?

  • Carlos A. Primo Braga, Gallina A. Vincelette(Authors)
  • 2011(Publication Date)
  • World Bank

    (Publisher)

  avoiding avoidable debt crises 245 Kehoe 1998). One problem with this interpretation is that limited costs of default are observed, even when the focus is on the evolution of GDP growth (Benjamin and Wright 2008; Levy-Yeyati and Panizza forthcom- ing; Tomz and Wright 2007). It is possible that only strategic defaults (that is, defaults that could eas- ily have been avoided) carry a high cost. Defaults caused by true inability to pay are unavoidable. Therefore, they do not provide any signal on the type of government and do not carry a large cost (Grossman and Van Huyck 1988). Knowing the high cost of strategic default, countries will avoid them. To the contrary, they may even pay a large cost to postpone a necessary default in order to signal to all interested parties that the default was indeed unavoidable (Borensztein and Panizza 2009; Levy-Yeyati and Panizza forthcoming). The legal literature has focused mainly on the restructuring aspects of sovereign debt. Broadly speaking, sovereign Debt Restructuring can be understood as the mechanism used by a sovereign state to prevent or resolve debt issues and achieve debt sustainability levels. Restructuring has two main aspects: procedural and substantial. The procedural aspect focuses on the way in which the restructuring should be performed (that is, its architecture); the substantial aspect is the actual restructuring of debt, which normally involves changing amortization schedules and writing off the debt principal (Olivares-Caminal 2010). There is widespread agreement for a revamped sovereign debt- restructuring process for private claims. There is disagreement over what the actual process should be (Arora and Olivares-Caminal 2003): court-supervised workouts in a bankruptcy-type proceeding or a purely voluntary bond workout (Buchheit and Gulati 2002). Policy makers need to select the model that will provide orderly restructuring while safeguarding the rights of both creditors and the debtor.

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  Managing Financial and Corporate Distress

  Lessons from Asia

  • Charles Adams, Robert E. Litan, Michael Pomerleano, Charles Adams, Robert E. Litan, Michael Pomerleano(Authors)
  • 2010(Publication Date)
  • Brookings Institution Press

    (Publisher)

  Governments of emerging market countries facing such a crisis therefore have a political incentive to put it behind them, and normalizing relationships with foreign credi-tors is a key part of doing so. Hence borrowers facing difficulty in ser-vicing their debts have all the more reason to agree to a restructuring if that is what the lenders seek. 34 BENJAMIN M. FRIEDMAN How Easy Should Restructuring Be? One of the great paradoxes of banking is that repudiating ones debts makes a borrower more creditworthy. The standard explanation is that as long as the borrower has some remaining assets, or even just some prospect of a stream of future income, under the usual me-first rules the bottom tranche of debt is always the least risky. Getting rid of all existing debts gives some new creditor the opportunity to hold what will amount to the first tranche. (The analogy to debtor-in-possession financing, and hence the value of establishing workable bankruptcy standards such that this can be done, should be self-evident.) Examples of the working of this paradox are not hard to find. In the United States the surest way for an individual to find his or her mailbox overflowing with new credit card offers is to declare personal bankruptcy. In a context closer to the focus of this discussion, global investors in the early 1990s raced to buy bonds issued by sovereign credits that had just written down the principal on their outstanding debt under the Brady Plan. One of the chief motivations underlying the current proposal for organized forgiveness of the debts of the world s fifty or so poorest coun-tries is the hope that once the existing debt is expunged, lenders will promptly extend new credit. What makes this behavior paradoxical is the commonsense notion that actions follow a pattern, and so reputation matters.

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  International Capital Markets : Developments and Prospects

  • Donald Mathieson, Eliot Kalter, Maxwell Watson, and G. Kincaid(Authors)
  • 1986(Publication Date)
  • INTERNATIONAL MONETARY FUND

    (Publisher)

  IV Recent Trends in Bank Restructuring

  Passage contains an image

  General

  Successful restructuring of countries’ bank debt has continued to demand intensive coordination among banks, governments, the Fund, and other multilateral agencies on the financial requirements associated with adjustment programs, and continuous liaison by the coordinating banks with all creditor banks to secure agreement on the restructuring packages. Almost all restructurings have been linked to a Fund-supported adjustment program. A detailed discussion of current trends in bank Debt Restructuring is contained in Recent Developments in External Debt Restructuring .27 This section summarizes key points from that study, and updates the statistics and description of developments.

  While the basic approach to solving debt-servicing problems has been maintained from the outset of the debt problem, more recently, creditors have been willing to enter into longer-term arrangements with a number of countries. To this end, debtor countries and banks have negotiated MYRAs. However, for some countries engaged in debt-restructuring negotiations, the process has been complex and slow, especially where agreement on new financing has been sought. In some cases, final agreements have yet to be signed, despite prolonged negotiations.

  The type of debt included in bank debt has reflected a number of factors. One major consideration has been a concern to achieve equitable burden-sharing among banks, which has involved securing agreement from all of a country’s creditor banks. Another important consideration has been to minimize the potential danger to restructuring countries’ prospects of regaining access to international capital markets. Therefore, interest payments on bank debt have been excluded from reschedulings in almost all cases, although banks have been willing, in some cases, to reduce the interest rate on existing loans; formal restructuring of trade credits and interbank deposits has been avoided whenever feasible; and bonds and floating rate notes owned by nonbanks generally have been excluded from restructuring, in part, because their holders have not normally been known.

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  Turmoil at Twenty

  Recession, Recovery, and Reform in Central and Eastern Europe and the Former Soviet Union

  • Pradeep Mitra, Marcelo Selowsky, Juan Zalduendo(Authors)
  • 2010(Publication Date)
  • World Bank

    (Publisher)

  The operational restructuring that follows, at least for corporate-related assets, depends on the management control that emerges from the transfer of assets. In some cases, the earlier involvement of outside investors can facilitate operational restructuring. The challenge in ECA is also unique in that bank distress is linked in part to household debt, which was not so in previous crises. Facilitating Debt Restructuring Countries typically have insolvency frameworks to deal with bankruptcy, reorganization, and liquidation, but fledgling judicial systems can be over- whelmed in a systemic banking crisis. To expedite Debt Restructuring, govern- ments in countries as diverse as the Czech Republic, Indonesia, Korea, Malay- sia, Mexico, Thailand, and Turkey have been active in setting up out-of-court voluntary workouts between debtors and creditors. While the workouts lie outside the formal insolvency framework, their success depends on the qual- ity of that framework. 15. The reader interested in the experience with Debt Restructuring is directed to work by Claessens (2005), Lieberman et al. (2005), and Lieberman and Mako (2009), who examine in particular the expe- rience during the East Asia crisis and more recent experiences. 144 TURMOIL AT TWENTY The “London approach” . . . In the variant directed at dealing with corporate restructuring, the so-called “London approach” is based on three broad principles. It seeks, first, to mini- mize losses to creditors from unavoidable company failures through well pre- pared workouts. Second, it aims to avoid unnecessary liquidation of viable companies, through reorganization and preservation of employment and pro- ductive capacity. Third, it finds ways to provide financial support to compa- nies deemed viable in cases where creditors cannot agree to the terms for con- cluding a workout.

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  Financing National Defense

  • Lawrence R. Jones, Philip J. Candreva, Marc R. DeVore(Authors)
  • 2016(Publication Date)
  • Information Age Publishing

    (Publisher)

  Restructuring, Reducing Budgets and Debt While Managing Fiscal Stress  379 relatively low interest loans over long terms and, in some cases, direct infu- sion of capital into the receiving nations and their banks, e.g., loans to Ire- land and other financially troubled European nations. In the case of Greece lending from the European Union (EU) and the International Monetary Fund (IMF) were predicated on the receiving nation’s willingness to engage in longer term budget reductions and measures to increase tax revenues. While some Debt Restructuring was part of these types of relief packages this approach was used less extensively than under the next option. 4. Debt workouts orchestrated by Congress and the President in the US, and by international organizations (e.g., the EU, IMF and others) that pro- vided relatively low interest loans over long terms and also required and enabled significant Debt Restructuring, spreading and extending pay back periods and incorporating some form of defeasance, i.e., writing off some debt (forgiveness) to domestic and international lending institutions. The so called Brady Plan orchestrated by the US in the period 1999–2001 in cooperation with international lenders that pulled Argentina out of bank- ruptcy involved forgiveness and collateralizing (backing up) some of the long term debt using US Treasury bonds. This approach also assumes gov- ernment budget reductions and some schedule for future tax increases when the economies of debtor nations begin to recover. In the case of Ar- gentina these policies succeeded; the Argentine recovery continued until the global fiscal collapse in late 2008. This option reveals the advantage of incorporating some degree of debt forgiveness into restructuring programs where this is an option. This model could have been employed to a greater extent by US banks and other lending institutions to resolve the long lin- gering problems of excess debt and inventory in the housing industry.

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  Struggling With Success: Challenges Facing The International Economy

  Challenges Facing the International Economy

  • Anne O Krueger(Author)
  • 2012(Publication Date)
  • World Scientific

    (Publisher)

  Part III SOVEREIGN Debt Restructuring This page intentionally left blank This page intentionally left blank Chapter 9 A NEW APPROACH TO SOVEREIGN Debt Restructuring Greater integration of capital markets and the shift from syndicated bank loans to traded securities have had a profound impact on the way that emerg-ing market sovereigns finance themselves. Sovereigns increasingly issue debt in a range of legal jurisdictions, using a variety of different instruments, to a diverse and diffuse group of creditors. Creditors often have different time horizons for their investment and will respond differently should the sover-eign encounter a shock to its debt servicing capacity. This is a positive development: it expands sources of sovereign financing and diversifies risk. But the greater diversity of claims and interests has also made it more dif-ficult to secure collective action from creditors when a sovereign’s debt service obligations exceed its payments capacity. This has reinforced the tendency for debtors to delay restructuring until the last possible moment, increasing the likelihood that the process will be associated with substantial uncertainty and loss of asset values, to the detriment of debtors and creditors alike. During the past several years there has been extensive discussion inside and outside the IMF on the need to develop a new approach to sovereign Debt Restructuring. There is a growing consensus that the present process for restructuring the debts of a sovereign is more prolonged, more unpredictable and more damaging to the country and its creditors than would be desirable. Exploring ways to improve the sovereign Debt Restructuring process is a key part of the international community’s efforts to strengthen the architecture of the global financial system. The absence of a predictable, orderly, and rapid process for restructuring the debts of sovereigns that are implementing appropriate policies has a num-ber of costs.

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  External Indebtedness of Developing Countries

  • Ulrich Baumgartner, G. Johnson, K. Dillon, R. Williams, Peter Keller, Maria Tyler, Bahram Nowzad, G. Kincaid, and Tomás Reichmann(Authors)
  • 1981(Publication Date)
  • INTERNATIONAL MONETARY FUND

    (Publisher)

  The banks have consistently attempted to adhere to the principle that the debtor pay future interest on schedule, and this was reflected in most of the agreements under review. One agreement, however, did contain a provision whereby interest payments in excess of 7 per cent were deferred during the early years of the agreement. Where arrears on interest have emerged, the banks have always initially insisted that the country become current on interest payments before other parts of the rescheduling agreement are implemented. Two of the final agreements, however, provided for a rescheduling of part of the arrears on interest, albeit on much shorter terms than provided for overdue principal. In one agreement, the debtor’s request for such treatment of interest in arrears delayed the negotiations for many months.

  The banks generally have been willing to consider the restructuring of principal in arrears, but the existence of large overdue balances has tended to make the negotiations more difficult and the banks less willing to include new money in the restructuring package. This stance reflects partly the concern of the banks to protect the interests of their shareholders and depositors and partly the knowledge that bank regulators will take a negative view of increased exposure in a country where debt servicing arrears have accumulated. The approach of private banks to Debt Restructuring is governed by conditions that are different from those of official institutions.

  None of the formal agreements covered short-term debt except for amounts in arrears. In some instances problems arose for the debtor because individual banks cut back on trade financing or reduced their short-term credit lines while a Debt Restructuring was being pursued or even after the agreements had been signed. On at least two occasions, the authorities raised the issue of short-term trade financing with the bank steering committees, and informal understandings were reached on the maintenance of short-term exposure. The disbursement of one new medium-term loan—agreed as part of the restructuring package— was tied to letter-of-credit financing for imports to ensure that new money from one bank was not used to repay short-term borrowing from other banks. Thus, the principle of fair treatment among creditor banks, as well as the prospects for the debtors’ balance of payments recovery, depended in part on the extent to which the banks were willing to maintain shorter-term trade financing facilities in these difficult situations.

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