FINANCIALRESTRUCTURING. PREPARED BY : NAVEEN KUMAR & TARUN VENAI.
Meaning of FinancialRestructuring. The term “ Financial restructuring ” is the process of reshuffling or reorganizing the financial structure, which primarily comprises of equity capital and debt capital. Financial restructuring can be done because of either compulsion or as part of the financial strategy of the company.
For example : Kingfisher Airlines losses in Q3, taking the total loss to $240 million previous year, as the ailing Indian carrier was squeezed by high fuel costs, a weaker rupee and competition. Current market price is 19.95 as per BSE and 20.05 as per NSE till on 14 march,2012 by latest.
Kingfisher Airlines has opted to do Financial restructure to cover their loss margin.
Continued… Financial restructuring is the reorganization of the financial assets and liabilities of a corporation in order to create the most beneficial financial environment for the company. The process of financial restructuring is often associated with corporate restructuring, in that restructuring the general function and composition of the company is likely to impact the financial health of the corporation.
Why financialRestructuring ?Financial Restructuring is done for various business reasons and those could be…. Poor financial performance External competition Erosion (loss) of market share Emerging market opportunities
Components of FinancialRestructuring.1. The financial restructuring can be either from the assets side or the liabilities side of the balance sheet. If one is changed, accordingly the other will be adjusted.2. The two components of financial restructuring are : Debt Restructuring. Equity Restructuring.
Debt restructuring. Debt restructuring is the process of reorganizing the whole debt capital of the company. It involves reshuffling of the balance sheet items as it contains the debt obligations of the company. A company’s financial manager needs to always look at the options to minimize the cost of capital and improving the efficiency of the company as a whole which will in turn call for the continuous review of the debt part and recycling it to maximize efficiency.
Components of debtrestructuring. Restructuring of secured long-term borrowings : Restructuring of secured long-term borrowings will be done for the following reasons such as reducing the cost of capital for healthy companies. for improving liquidity and increasing the cash flows for a sick company.
Restructuring of unsecured long-term borrowings : Restructuring of the long-term unsecured borrowings will be done depending on the type of borrowing. These borrowings can be public deposits, private loans (unsecured) and privately placed, unsecured bonds or debentures.
Restructuring of secured working capital borrowings : Credit limits from commercial banks, demand loans, overdraft facilities, bill discounting and commercial paper fall under the working capital borrowings. All these are secured by the charge on inventory and book debts and also on the charge on other assets. The restructuring of the secured working capital borrowings is almost all the same as in case of term loans.
Restructuring of other short term borrowings : The borrowings that are very short in nature are generally not restructured. These can indeed be renegotiated with new terms. These types of short-term borrowings include inter-corporate deposits, clean bills and clean over drafts.
Equity restructuring. Equity restructuring is the process of reorganizing the equity capital. It includes reshuffling of the shareholders capital and the reserves that are appearing in the balance sheet. Restructuring of equity and preference capital becomes a complex process involving a process of law and is a highly regulated area.
Reasons behind equityrestructuring.The following are the reasons for which equity restructuring is done: Correction of over capitalization To provide respectable exit mechanism for shareholders in the time of depressed markets by providing them liquidity through buy back. Reorganizing the capital for achieving better efficiency To wipe out accumulated losses To write off unrecognized expenditure To maintain debt-equity ratio For raising fresh finance.
Can your Business benefitfrom Financial Restructure ? Financial restructuring is any substantial change in a company’s financial structure, or ownership or control, or business portfolio, designed to increase the value of the firm. If you want to increase the value of your firm, you may need to reorganize your financial assets in order to create the most financially beneficial environment for the company.