Default vs restructuring: is there a difference? - Dian Blackwood

The subject of default and restructuring has always been a topical issue. With all the technical jargon being swirled around how many of the “average Joe” can say they truly understand what each term means? Should a company or country have to default or restructure, what exactly is in store? Let’s examine both it their simplest of forms.
The subject of default and restructuring has always been a topical issue. With all the technical jargon being swirled around how many of the “average Joe” can say they truly understand what each term means? Should a company or country have to default or restructure, what exactly is in store? Let’s examine both it their simplest of forms. Default A loan default occurs when a debtor has not met his/her legal obligations according to the terms agreed upon. Default may occur if the debtor is either unwilling or unable to pay their debt.  This can occur with all debt obligations, including bonds, mortgages, loans and promissory notes.  Unfortunately default is not restricted to individuals or companies as countries may also find themselves in difficulties. A country default may occur if a nation has issued bonds denominated in foreign currency and cannot afford to purchase the necessary foreign currency at bond repayment time. This could be either at coupon payment date or maturity.  Unlike a corporation, a nation cannot file for bankruptcy, which explains the most recent practice of offering bondholders an exchange offer when default is knocking on their doors. In a bond exchange offer, bondholders may be asked to exchange their existing bonds for another class of debt or equity securities. This may be a viable option for companies that are seeking to extend maturities, reduce outstanding debt or convert debt into equity. An event of default is often followed by a restructuring of the debt as the debtor tries to make some accommodation with his creditors (bondholders etc.) and the creditors seek to minimise their losses on the loans that they have advanced. Restructuring A debt restructuring can be explained as the practice whereby companies, individuals and countries engage in discussions with their creditors to renegotiate the terms of their loans. If negotiations are successful for the debtor, the “present value” of its loans would have been reduced thereby eliminating some of the financial harm. If there is a fear of bankruptcy, repositioning or buyout an alternative option may be restructuring. When faced with the trouble of making payments on its debt the prospects of adjusting the terms and conditions of the debt may seem like a practical solution. A debt restructuring makes the debt more manageable for the party that has borrowed the money and increases the likelihood of future payments to bondholders. Restructuring may involve a company cutting cost such as payroll, reducing its size through sale of assets or reducing operations; this may be deemed necessary if the current level of debt makes a collapse inevitable. Strategic restructuring reduces financial losses while reducing the tensions that may brew between debt and equity holders to facilitate a prompt resolution of a distressed situation. If a company/country is faced with severe financial problems it is critical that the lines of communications are open and all parties involved are fully kept abreast of the steps that will be taken to alleviate the evils. Debt restructuring usually involves some losses on the part of the creditors and while the debtor will be seeking to get as much relief as possible, the creditors will be trying to give up as little as is needed to allow the debtor to meet his future obligations to them.

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