Summary and Conclusions
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Over the last few years, the continuity of a large number of companies has depended at some time on a debt restructuring process to which the senior management of the firms in question have dedicated a considerable amount of effort and time. In short, companies in highly diverse sectors have survived — or gone under — as a result of their capacity to restructure and refinance their debts.
A company needs a restructuring process when it is facing a situation of economic distress. A company is in a situation of economic distress when it does not generate enough cash flow to cover the payments required by its debt with financial entities.
Of course, this lack of cash to cover payments of the service of debt must be a permanent situation, since any temporary imbalance might be covered with money coming from the shareholders.
Restructuring a company means introducing changes to a company to make it viable and profitable, given that the company is currently unfeasible and unprofitable. Although any corporate restructuring implies financial restructuring, it doesn’t necessarily need to be only about its refinancing. The objective of any restructuring is to implement changes in the company so that it will generate enough FCF to cover the service of debt and remunerate its shareholders satisfactorily.
A restructuring process is a process of negotiation. As in all negotiating processes it is important to understand the interests of all the parties involved, recognizing their strong points and weak points, their negotiating clout, and so on.
And, of course, it is important to know the answers to key questions, like:
Why did it happen?
What are the main debt restructuring actions that need to be taken?
What advantages will the debt restructuring process bring to the different parties involved?
What can the company offer to reach agreements in which everybody gains?
The key to success in any restructuring process is to reach an agreement whereby the value of the restructured company is greater than it would be if it were wound down, and then to agree on how this greater value should be distributed. One of the most important points for discussion is that of agreeing on a realistic plan for the future, and ensuring that securing sufficient free cash flow for short-term viability does not jeopardize the firm’s medium- and long-term future by limiting investment plans that are essential for the continuity of the business.
KeywordsCash Flow Capital Structure Free Cash Flow Restructuring Process Economic Distress
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