Financial Restructuring (or Corporate Restructuring) means reorganizing a company’s assets and liabilities to maximize the value to shareholders, creditors, and other stakeholders.

Financial restructuring can done by a company be done because of either compulsion or as part of a financial strategy. It relates to improvements in the capital structure of the company.

Reorganizing can be either on assets side or on the liabilities side of the balance sheet, if value of one side changes, other side will accordingly adjusted.

This restructuring can be adopted by those firms which are in financial distress at present but hold prospect for better performance in future (if the budget is structured according to the situation).

There are two components of financial restructuring –
  • Debt Restructuring and
  • Equity Restructuring

1) Debt Restructuring

Debt restructuring is the process of reorganizing the whole debt capital of a firm. It involves reorganizing the balance sheet items that contains the debt obligations of the company.

It is used as a business tool by company’s financial manager to look at the options of minimizing the cost of capital and improving the efficiency of the company as a whole.

Debt restructuring can be done on various circumstances by a firm.

These can be classified into three ways –
  • A firm can go in for debt restructuring to change its debt by making use of various market opportunities by substituting the current high cost debt with low cost loans.
  • If a firm is facing liquidity problems or low debt servicing capacity problem, can opt for debt restructuring to reduce the cost of borrowed funds and to increase the position of working capital.
  • An insolvent firm can go for debt restructuring in order to make it solvent and free from the losses.
Reasons of Equity Restructuring
  • To avoid business bankruptcy
  • To reduce debt and stretch it into fixed, affordable monthly payments
  • To save time dealing with creditors and other lenders (such as banks and institutions)
  • To retain management control
  • To avoid unnecessary legal fees
  • To manage smooth cash flow and manage budget
  • To rebuild credibility.

2) Equity Restructuring

Equity restructuring means the process of reorganizing the equity capital (shareholders’ capital) and reserves in the balance sheet.

Restructuring of equity involves a process of law and is a highly regulated tool in finance. It mainly deals in a concept of capital reduction.

The following are the methods of equity restructuring –
  • Restructuring of share capital can be done by repurchasing the shares from the shareholders. This helps to reduce the liability of the company to the shareholders which results in capital reduction but returning the share capital.
  • Equity restructuring can be done by writing down the share capital by certain appropriate accounting entries. This will help to reduce the amount owned by the company to its shareholders without actually returning equity capital in cash.
  • Restructuring can also be done by reducing the dues that a shareholders need to pay.
  • It can also be done by consolidation of the share capital or by subdivision of the shares.
Reasons of Equity Restructuring
  • To correct over capitalization
  • To shore up management stakes
  • To provide respectable exit for shareholders in the period when market is down.
  • To record unrecognized expenditure
  • To maintain efficiency in debt-equity ratio
  • To raise fresh finance.