What are the common types and features of debt restructuring agreements?

We all understand the structural elements however restructuring is at the margin, value recapture. The human/corporate relationships that comprise the transaction(s) should not be overlooked. Each party has different objectives which begin with but not end in principal recapture.

The financial position and motivation of the parties matters. eg: if the lender has already marked down their position its much easier. Many lenders are not able to hold equity, so debt-for-equity swaps are non starters, but future profit participation or revenue share may be. Rescheduling may be viable but a write off/bullet payment in conjunction with a refinancing may be preferred particularly if the lender is trying to wind up a prior fund and your loan is in it. In a prepackaged buyout too much debt kills the deal so combining an equity recap with a debt write down buys runway for repayment. Avoid PIK Notes.

When considering debt restructuring, it is essential to understand the difference between Debt restructuring and debt forgiveness. The two distinct approaches to managing debt obligations uniquely differ in application and implication. Debt restructuring aims to modify the terms of existing debt agreements to make them more manageable for the debtor. This can involve negotiating with creditors to lower interest rates, extend repayment periods, or alter the currency denomination of the debt. The goal is to alleviate the debt burden without reducing the amount owed. Debt forgiveness, however, directly reduces or eliminates a portion of the debt amount. This typically occurs when the debtor faces severe financial distress and cannot repay.

Debt restructure can offer several benefits to both debtors and creditors. For debtors, debt restructure can: Reduce payments: By lowering interest rates, extend repayment periods, and consolidate multiple debts into a single loan, debt restructure can make debt payments more manageable and reduce the overall financial burden. Improve cash flow: By freeing up more cash, debtors can invest in growth opportunities to improve their financial standing while avoiding a risk of default. Prevent bankruptcy or liquidation: Debt restructure can provide a lifeline for struggling businesses, helping them avoid negative consequences of bankruptcy/liquidation. Protect assets: debt restructuring can help debtors protect their assets from seizure etc..

Debt restructuring is a complex process that can present challenges for both debtors and creditors. Complexity and Time Commitment: Debt restructure negotiations can be intricate and time-consuming, requiring expertise in financial analysis, legal matters, and negotiation strategies. The involvement of multiple parties, such as creditors, debtors, and government agencies, can complicate the process. Reputation: Debt restructure can negatively impact the debtor's creditworthiness, making it more difficult to obtain financing. Creditors may also face reputational risks if they are seen as accepting unfavorable terms or concessions that could set a precedent for other debtors. This represents a couple of challenges of debt restructure.

Firstly, if you’re going to propose any form of debt restructuring, it has to be on the basis that there is a profitable model going forward and such model needs to stand up to scrutiny, specifically its underlying assumptions. Secondly, why and over what period has the issue(s) leading to the requiring of the proposal occurred? Are the Board culpable? If so, then it can be a big ask expecting creditors/stakeholders to support the person(s) responsible without perhaps change or an additional Board appointment, such as an interim, in order to provide added confidence/comfort.

Generally speaking, I would advise to focus on the following issues: - acting in good faith (contacting creditors way before any possible credit event, making them privy to more details about business plan) - review business plan and identify possible area of weakness - post mortem about existing situation Should creditors still believe in the viability of the business, there is plenty of room to negotiate: in fact, recovery value on a defaulted company's assets is usually pretty low, given the plethora of additional costs. Needless to say, it varies from industry to industry.

Besides debt restructuring, it's important to look at other areas in the company for workflow improvements in all areas, with a look to reduce debt over time.