CORPORATE RESTRUCTURING

The Corporate Restructuring is the process of making changes in the composition of a firm’s one or more business portfolios in order to have a more profitable enterprise. It implies, reorganizing the structure of the organization to fetch more profits from its operations or is best suited to the case at hand.

The Corporate Restructuring is mainly of two types:

Financial Restructuring: The Financial Restructuring may take place due to a drastic fall in the sales because of the adverse economic conditions. Here, the firm can have the option of changing the equity pattern, cross-holding pattern, debt-servicing schedule and the equity holdings. All this is done to maintain the profitability of the firm and sustain in the market in long run. Generally, external help in terms of financial or legal advisors are hired to assist the firms in the negotiations.

Organizational Restructuring: The Organizational Restructuring implies changing the structure of an organization, such as reduction of the hierarchical levels, cutting down the size of the employees, redesigning the job positions and changing the relationship of reporting. It is done to minimize the cost and pay off the debt outstanding to continue with the business operations in some manner or the other.

The need for a corporate restructuring arises because of the change in company’s ownership structure due to a merger or takeover, adverse economic conditions, adverse changes in business such as bankruptcy or buyouts, over employed personnel, lack of integration between the divisions, etc.

What is the process and timeline of an Informal Restructuring?

The restructuring process does not follow any specified formula. The timing of a restructuring is cited by each particular situation. Some restructurings can be dealt with by a company entirely by focusing internally on performance improvement. That is to say, it is not necessary to involve external parties such as the company’s bankers or trade creditors. In more complex situations a company will need to approach its creditors and agree some sort of restraint by the creditors whilst the company deals with its own problems. This is what is often referred to as a “workout”. Where a restructuring involves creditors, the deal finally agreed between the company and its creditors should not follow a prescribed set of criteria. In practice, the agreements are quite promptive in nature and are designed to suit the specific requirement of the situation at hand. The risk and reward considerations revolve around the following:

• The type of debt instrument taken in exchange for existing debt;
• Debt to equity exchange ratio, which will require valuation;
• Ratio of equity dividend to creditors;
• Tax treatment of the residual debt and the converted amount.

What is a Workout or Informal Workout?

A Workout or Informal Workout is nothing but an Informal Restructuring by another name. It is referred to when there is a restructuring of very large companies involving negotiations with a large number of Financial Institutions like Banks and other institutions.

What is Financial Restructuring?

Financial Restructuring is a corporate restructuring process that addresses problems or inefficiencies caused by an inappropriate or inadequate capital structure of a company or business. It can involve matters such as following:

• Conversion of existing debts to equity;
• Conversion of preference shares to ordinary shares;
• Subordination of Debt;
• Debt compromise;
• The sale or transfer of existing debts or equity to more supportive new owners; and
• Accelerated sale of a part of the business.

What is Debt Refinancing?

Debt Refinancing is the review of a company’s debt finance to provide for a more appropriate type of finance or a rescheduling of the current terms of the same. Debt Refinancing usually focuses on the largest lenders to a company.Usually whilst a debt refinancing is being undertaken, trade creditors are paid their due in the normal course of business.

What is Operational Restructuring?

Operational Restructuring involves the identification of the causes of operational under-performance and the development of a strategy to achieve improvement in the same. That is, Operational Restructuring focuses upon the profitability of operations. It does not take into account the capital structure or financing structure of a company. The plan will usually cover the following arenas:

• Reviewing of products as well markets to assess their contribution to profit;
• Alignment of costs with revenues and making appropriate cost reductions;
• Rationalization of operations and facilities to improve efficiency and release cash;
• Disposal of underperforming as well as non-core businesses;
• Identification of skills and resource gaps in the management team;