What Is Debt Restructuring?
Debt restructuring is a process used by companies to avoid the risk of default on existing debt or to take advantage of lower available interest rates. Debt restructuring can be carried out by individuals on the brink of insolvency as well, and by countries that are heading for default on sovereign debt.

KEY TAKEAWAYS

• The debt restructuring process can be carried out by reducing the interest rates on loans or by extending the dates when a company’s liabilities are due.
• A debt restructure might include a debt-for-equity swap, when creditors agree to cancel a portion or all of the outstanding debt in exchange for equity in the company.
• A nation seeking to restructure its debt might move its debt from the private sector to public sector institutions.

How Debt Restructuring Works
Some companies seek to restructure debts when they’re facing bankruptcy. They might have several loans are structured in such a way that some are subordinate in priority to other loans. The senior debtholders would be paid before the lenders of subordinated debts if the company were to go into bankruptcy. Creditors are sometimes willing to alter these and other terms to avoid dealing with a potential bankruptcy or default.

The debt restructuring process is typically carried out by reducing the interest rates on loans, by extending the dates when the company’s liabilities are due to be paid, or both. These steps improve the firm’s chances of paying back the obligations. Creditors understand that they would receive even less should the company be forced into bankruptcy and/or liquidation.

Restructuring debt can be a win-win for both entities. The business avoids bankruptcy and the lenders typically receive more than what they would through a bankruptcy proceeding.

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