the companies favor financial restructuring as the company can still be in the business and can avoid the legal problems associated with bankruptcy proceedings.
The goal of a debt restructuring is to lower the interest payments and extend the terms of the loan in order to get through a bad patch and not to write off a companys debt. Companies considering the debt restructuring must first prove that their current market downturn is a temporary phenomenon and will ultimately past and the company will be able to resume profitability. Thus companies have to convince their stakeholders like creditors, bankers, and distributors that the company will be able to improve the financial condition with the new finance arrangements within a specified period of time.
It is important that all the stakeholders actively participate in the preparation of the Financial Restructuring Plan. In some cases even after the Financial Restructuring plan is implemented the company would end up in bankruptcy due to dissatisfaction among certain group of stakeholders or due to bad execution of the Plan. Bankruptcy should be the last option for the companies as only about 15 to 20% of the companies are able to come out of bankruptcy and the cost of bankruptcy is pretty high.
It is evident from the current Case study that the company is Over leveraged, that is the debt:equity ratio is very high. Financial restructuring would also be taken up by the companies which are Under leveraged. These companies raise debt to buy back shares. Financial restructuring can also be taken up when the company’s financial position is effected due to Sluggish sales or seasonal sales problems. Often company would raise debt to fund expansion projects but the expansion projects do not give the expected returns resulting in the defaulting of interest payments by the company. Financial restructuring helps the company improve its credit score, which would be useful if the company intends to borrow in future.