Navigating debt restructuring in uncertain times

Present global economic conditions are precarious and uncertain. Against the backdrop of increasingly unfavourable headwinds to trading emerging across many sectors, the Reserve Bank of Australia latest growth forecasts indicate a weakening in GDP growth, and increasing interest rates.

This places ongoing pressure on many companies with fragile balance sheets to deleverage, enabling their businesses to continue as a going concern.

One commonly selected strategy to achieve this is a debt restructure, converting debt into equity.

This can be done as the central component of a restructure or in combination with restructuring existing debt, including:

• extending maturity dates
• reducing cash interest payments (by capitalising some or all of the interest amount)
• waiving actual or potential loan covenant breaches
• introducing new money or securities.

Three main restructuring approaches

Whether ensuring continued solvency or restoring a company to solvency, there are three main restructuring approaches which can be adopted to deleverage the balance sheet.

Structure 1 – Consensual restructure agreed with lenders

This is the most straightforward approach where a lender, or a group of lenders agrees to take an issue of shares in exchange for the repayment of the debt. Instead of paying a cash subscription amount for the issue of the shares, the issue price for the shares is satisfied by the repayment of the debt.

Structure 2 – Solvent creditors’ schemes

A creditors’ scheme of arrangement is a process by which a company proposes a restructuring among a class of its creditors whereby those creditors compromise their claims against the company in exchange for some form of consideration. The scheme requires Court approval and approval by each relevant class of creditors voting at the scheme meeting convened by the Court.

Structure 3 - Alternatives in administration

In light of the current challenging and uncertain economic conditions, companies may become insolvent and may have no other option but to enter into external administration. Two of the most common forms of external administration are Voluntary Administration, which may result in a restructure by Deed of Company Arrangement, or liquidation.

Contact us to learn more about the three main restructuring approaches which can be adopted to deleverage the balance sheet to ensure continued solvency or restore the company to solvency.