Businesses at one time or another experience tight cash flows and liquidity challenges. During these times, lenders or creditors are sometimes alarmed at the risk of insolvency or illiquidity and the potential for the debt turning sour. Delayed repayments take their toll on the business relationship between the company and its bank lenders. Corporate debt restructuring or debt consolidation may be the answer to maintain the relationship without sacrificing financial stability or soundness of liquidity.
What is corporate debt consolidation?
Simply put, it is a financial facility that lets businesses let go of the past. Despite the resurgence of special purpose vehicles or asset management vehicles, non-performing loans still take their toll on business financials. Debts, especially non-performing or non-repaid ones, are bad for investors, bad for creditors, bad for suppliers, and the business need to do something about those debts in order to regain its image and reputation and credit standing. Restructuring or refinancing past debts can actually even give the business a new lease on its financial and credit life.
Debt consolidation as a way of reorganization
Reorganizing a company does not only mean moving people or changing organizational structures. Reorganization may also come in the form of debt consolidation or refinancing or restructuring. Voluntary or induced refinancing or restructuring is allowed within lender policies and procedures for sound repayment and remedial management. Refinancing simply means putting additional money when such additional money is needed to reinvigorate the loan performance through increased investment or lending. Restructuring is providing more manageable repayment options as in changing from a monthly to a quarterly amortization schedule or opting to amortize on principal payments later and focus on interest payments first for the time being, or outright re-scheduling to fit the present cash flow instead of the old one. Refinancing or restructuring or consolidating debts can actually give or provide the business with the cash flow needed even without resorting to additional borrowings.
How to make restructuring work
To make debt consolidation and restructuring work, there are a number of capital solutions that need to be considered and sometimes used in tandem with the consolidation efforts. These may include asset based lending, debtor-in-possession financing, reorganized financing, revolving credit line facilities, and even senior or tiered secured debt facilities. Each solution may work alone. But when combined with other efforts, you will be in a surprise as to how much it can do to your business.
Restructuring a loan starts with assessing with finality the capacity to pay of the corporation vis-à-vis its total outstanding obligations. Cash flow management is crucial and financial projections need to be realistic and near-accurate as they can be. The facility or exercise has to consider that it is not enough to lengthen the repayment process; what is probably more crucial is to identify or establish the time of repayment. Asset conversion cycles need to be looked at more closely in restructuring. The exact times when assets are converted to cash will spell the difference between the restructuring and consolidation being successful or not. The asset conversion cycle needs to look at various factors that affect the business cash flow, from internal factors to external ones. Each factor need to be weighed in light of its ability to affect cash flow projections and actual realizations.
If you want to learn more, consult with experts at CL King & Associates.
CL King acted as a Co-Manager for CenterPoint Energy Houston Electric. LLC in its $700 million General Mortgage Bond 30 year offering due 2/1/2049. The issue is rated A1/A/A+.