Debt Restructuring During Coronavirus Crisis
The severe economic downturn caused by the Coronavirus (COVID-19) has impacted many companies’ ability to make payments under their debt obligations. It follows, that many companies now find themselves in financial difficulty and need to take action to restructure their debts to enable them to manage their cash flow.
There are a number of ways in which businesses can agree with their lenders to restructure debts:
Swapping Debt for Equity
The debt for equity swap may be effected under a scheme of arrangement to ensure that it is binding on creditors and minority shareholders. Equity may comprise of shares, warrants or options. The value of the shares issued does not necessarily have to match the loan written off, nor is there a specific amount of time which shares must be held by the creditor. This is normally used as an alternative to putting a company into liquidation or administration.
Companies should take care when opting to swap debt for equity as it may be possible that the lender could end up with a substantial and controlling shareholding in the company.
Subscription and Repayment
A lender could subscribe cash for new shares and that cash could then be used by the company to repay the debt.
A company may be able to enter an agreement with its creditors to postpone the interest payments on the debt. This usually applies where the debt is paid in full by a set deadline.
Company Voluntary Arrangement (CVA)
A CVA is a form of restructuring which can protect companies from creditor pressure and allows them to settle unpaid debts with their creditors over a period of time. A CVA would need to be agreed with the company’s creditors and requires the approval by at least 75% (by value) of the creditors who vote on the proposal of a CVA.
In addition to the above options, companies may also wish to consider restructuring company operations which could provide additional time for the business to recover from the effects of COVID-19 and to get back on their feet. This may include streamlining or cutting back parts of the company or a reorganisation of their assets and liabilities.