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Restructuring orReframing is thecorporate management term for the act of reorganizing the legal, ownership, operational, or other structures of acompany for the purpose of making it more profitable, or better organized for its present needs. Other reasons for restructuring include a change of ownership or ownership structure,demerger, or a response to a crisis or major change in the business such asbankruptcy,repositioning, orbuyout. Restructuring may also be described as corporate restructuring,debt restructuring and financial restructuring.
Executives involved in restructuring often hire financial and legal advisors to assist in the transaction's details and negotiations. It may also be done by a newly-hiredCEO specifically to make the difficult and controversial decisions, required to save or reposition the company. It generally involves financing debt, selling portions of the company to investors, and reorganizing or reducing operations.
Strategic restructuring reduces financial losses, simultaneously reducing tensions betweencreditors andequity holders, in order to facilitate a prompt resolution of a distressed situation.
Corporatedebt restructuring is the reorganization of companies' outstanding liabilities. It is generally a mechanism used by companies which are facing difficulties in repaying their debts. In the process of restructuring, the credit obligations are spread out over a longer period with smaller payments. This can better allow the company to meet its debt obligations. Also, as part of this process, some creditors may agree to exchange debt for some portion of equity. Working with companies in this way in a timely and transparent manner may go a long way to ensure their viability, which is sometimes threatened by internal and external factors. The restructuring process attempts to resolve the difficulties faced by a corporate body and enable it to become viable again.
Steps:
In corporate restructuring,valuations are used asnegotiating tools and more than third-party reviews designed for litigation avoidance. This distinction between negotiation and process is a difference between financial restructuring andcorporate finance.[1]
From the point of view oftransfer pricing requirements, restructuring may entail the need to pay the so-calledexit fee (exit charge).[2][3]
SeeValuation (finance) § Valuation of a suffering company for discussion of the approaches taken.
Historically, European banks handled non-investment gradelending andcapital structures that were fairly straightforward. Nicknamed the "London Approach" in the UK, restructurings focused on avoiding debt write-offs rather than providing distressed companies with an appropriately sized balance sheet. This approach became impractical in the 1990s withprivate equity increasing demand for highly leveraged capital structures that created the market in high-yield andmezzanine debt. Increased volume of distressed debt drew inhedge funds and creditderivatives deepened the market—trends outside the control of both the regulator and the leading commercial banks.
A company that has been restructured effectively will theoretically be leaner, more efficient, better organized, and better focused on its core business with a revised strategic and financial plan. If the restructured company was a leverage acquisition, the parent company will likely resell it at a profit if the restructuring has proven successful.[4]
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