Types of Financial Restructuring
If a company is at a crossroads and is experiencing financial difficulties, it may consider a financial restructuring. The problem could be a default letter from its lender, uncertainty over how to handle a forbearance agreement, an unexpected loss of business, a lawsuit, or a bankruptcy filing. It’s a lot to navigate, and management may not know the best option given their situation.
In this article, we explore the various types of financial restructuring, focusing on the different forms of bankruptcy that a company can file for.
An organization that is considering a financial restructuring can benefit from the expert guidance of a corporate restructuring professional who knows the ins and outs of these complex financial transactions.
What is a Restructuring Plan and When Would You Use One?
What are the different ways of restructuring a company? There are various business restructuring methods, such as organizational restructuring, operational optimization restructuring, divestitures, and mergers and acquisitions. Financial restructuring to improve a company’s financial health can be accomplished through debt restructuring, equity financing, or debt-for-equity swaps. Often, this involves bankruptcy proceedings and sales of assets to generate cash and resolve debts.
Types of Restructurings
Bankruptcy, handled by the federal court system, is a legal process by which companies can obtain relief from outstanding debts. Depending upon the assets the company owns that can be liquidated, creditors can sometimes receive partial repayment. In some cases, there may be a repayment plan. There are different types of restructurings companies can explore.
Bankruptcy Filings
Bankruptcies are named according to its chapter in the U.S. Bankruptcy Code. For example, businesses can file under Chapter 7 or Chapter 11. In a Chapter 7 bankruptcy, assets are liquidated to pay off debts. Chapter 11 is a reorganization bankruptcy. A business can continue to operate while creating a payment plan to repay its creditors.
Out-of-Court Restructuring
An out-of-court UCC Article 9 sale is a process in which a bank forecloses on its collateral and oversees a sale of the company’s assets. This process can preserve the operation of the company as a new, debt-free entity with a clean balance sheet. Compared to a liquidation or closure, this type of restructuring also usually benefits the company’s secured creditors, as they’ll recover more of their money than if the business is liquidated.
Prepackaged Bankruptcy (Pre-packs)
A prepackaged bankruptcy, prearranged by the company and its creditors, simplifies and speeds up the Chapter 11 process so the company emerges from bankruptcy more quickly. It also saves money. This kind of financial reorganization requires agreement from both shareholders, lenders and the court. However, there are risks involved, such as creditors taking action before it is legally required, unsecured creditors being offered little to no return, lower earnings after the bankruptcy, and an increased likelihood of failure for the company.
Chapter 9 Bankruptcy
A Chapter 9 bankruptcy is the only legal option in the U.S. Bankruptcy Code available to insolvent municipalities. Chapter 9 allows cities, counties, townships, public improvement districts, and school districts to file for bankruptcy to address financial difficulties through a reorganization plan. Since these entities provide essential residential services, they cannot sell assets in a liquidation. Instead, Chapter 9 lets them restructure debts through an adjustment plan.
Assignment for the Benefit of Creditors (ABC)
The ABC process is an alternative to the Chapter 7 bankruptcy process. It allows a company and its creditors to avoid the uncertainty and delay of a formal bankruptcy proceeding. ABCs are especially useful when distressed transactions, quick action, and industry expertise are required to extract value from asset liquidation while the company’s overall value is diminishing.
What is Corporate Restructuring and Why Does it Matter?
What is corporate restructuring? It is a process that many companies go through to enhance the quality of products and services, cut costs, improve productivity and efficiency, boost profits, and increase competitiveness. The restructuring process reorganizes the company’s finances, operations, and management to enhance its effectiveness. A corporate restructuring strategy is intensive and can be complex, starting with a detailed evaluation of company assets and overall value. This restructuring may involve closing underperforming business divisions to retain solvency.
Successfully Navigate the Best Financial Restructuring Strategy for Your Business
There are many options for business restructuring. Some are more streamlined with a faster timeline. Others allow the company to continue operating in the hope that it can avoid insolvency. The best strategy will be the one that most closely fits your organization’s needs and its current financial situation.
Navigating the complexities of restructuring can be daunting, but you don’t have to face it alone. SierraConstellations Partners is here to guide you through the process. To inquire about financial restructuring services contact SierraConstellations Partners.