Debt restructuring refers to a means which corporations or countries with overwhelming debt loads utilize to change the terms of their outstanding debt arrangements so they can gain advantage in repayment. Corporations will often utilize a form of debt restructuring so that they can sidestep defaulting on their already existing debt levels. They might also wish to gain the benefits of lower interest rates that may be available to them on the markets.
One way that companies accomplish this is by issuing a series of callable bonds. These permit them to easily and rapidly restructure their new debts at a given point in the future. In this case, the firms’ existing debts will be called. They will then replace them with a newer issued debt for the lower, more advantageous interest rate. Another way that corporations are able to restructure their debt lies in changing the provisions and terms of the current debt issue.
With corporate debt restructuring, a company will typically reorganize its actual obligations by lowering the debt burdens on their firm. They can do this by reducing the payable rates on the debt or by extending the amount of time they have until they repay the debt obligations. By doing either of these, the company ensures it is able to service its relevant debt burdens. There are other cases where the creditors will opt to forgive a part of the debt in exchange for obtaining an equity stake in the firm.
A need for this type of corporate debt restructuring most often occurs when corporations or companies are experiencing financial difficulties. These make it most difficult to keep up with their full range of financial obligations. Sometimes such troubles can be sufficient to create a significant risk of the company declaring bankruptcy. In these cases, they have the ability to engage in a structured negotiation with the creditors to lower the burdens so that they can avoid entering bankruptcy-led defaults.
Within the United States, there is a provision of the corporate bankruptcy code known as Chapter 11. These protocols permit corporations to obtain effective protection from their creditors so that they are able to try to rearrange the debt terms to continue on as a reorganized, ongoing, viable concern. Thanks to federal bankruptcy courts becoming involved in this process, even when the creditors refuse to accept such a settlement and reorganization, the courts can mandate that the creditors accept the plan if they deem it to be reasonable and fair.
It is not only corporations and companies which can avail themselves of such debt restructuring. Governments also have needs for help with their debts when they finally become unsustainable. This is not a new phenomenon. It stretches back to the first historically recorded sovereign debt default of the fourth century B.C. At this time, ten different Greek city-states defaulted on loans they had taken from the sacred temple of Delos. Despite the fact that this has occurred for at least 2,300 years, today no clear and mutually understood rules exist to structure the process for what will occur if a sovereign state can not pay their debts.
The most recent classic example of this dates back to the huge default by Argentina. Their enormous debt default in 2001 was among the largest in modern history. The rules are unclear as to who has jurisdiction and who can set restructuring terms. For years Argentina refused to negotiate terms with the eight percent of its bondholders who would not agree to the terms the country set in 2001. Then a court ruling from the U.S. Supreme Court confused the issue by ordering Argentina to settle with the remaining holdouts at full value plus interest before they could pay the agreed-upon settled amount to the other 92 percent of debt holders.
Argentina then came back to the table for the eight percent of mostly opportunistic hedge funds which had bought their defaulted debt for pennies on the dollar. Grudgingly under duress they paid the hedge fund eight percent claimants. This was an unusual case study that only worked out because the debt had been issued under American debt law. In other cases and scenarios, it is only the IMF International Monetary Fund that is attempting to create some sort of rules on situations like these.
Yet in the end, no one can force a country to pay its debts back to creditors short of going to war with them to seize their physical assets or by freezing assets of the offending country in the banks or vaults of the debt holders’ countries.