Understanding the mechanisms of restructuring a company's debt and knowing how to restructure this debt is a key skill for the manager of the company. And not just when the economic situation is tense. We explain to you!
Between 2010 and 2020, the indebtedness of non-financial corporations continued to increase. With the Covid crisis, the financing needs of companies have increased sharply. And not many are lucky enough to have secured loans! This is to say how essential it is to be able to make the decision to restructure your debts.
What options for SMEs facing financial difficulties?
First, the manager restructures the debt to reduce its repayment, if necessary in the treatment or anticipation of cash flow difficulties
In the event of insufficient cash flow from activity, a manager can negotiate an extension of the repayment period of the existing debt to reduce the amount of annuities;
It can give itself leeway by mobilizing assets. The sale and lease-back operation resolves a cash flow and / or MLT financing difficulty (medium-long term). This operation consists of selling a fixed asset to a credit institution and setting up a leasing contract on this asset. This provides the company with cash that it would not otherwise have been able to obtain. She continues to use the assets and benefits from a term repurchase option. The taxation of the capital gain on the sale could sometimes dissuade this transaction from being carried out. But the finance law removes this brake. It reintroduces the possibility for companies to spread the taxation of the capital gain on the sale over the duration of the financing, which ensures the tax neutrality of the transaction.
A manager must also anticipate the debt wall. He can renegotiate under better conditions before the due date. One of the modalities of this anticipation is to transform a loan in fine into a loan repayable over several years. It will also be possible in the amortization phase to incorporate a new period of one year where only interest; by remaining in a total loan period of 6 years.
Why restructure the debt of his company except financial difficulties?
Financial difficulties are not, however, the only reason that prompts the manager to restructure the debt:
In times of low interest rates, a manager may wish to reduce the cost of his debt to improve his bottom line, even in the absence of repayment difficulties. If the current cost of debt is lower than the cost of existing borrowing, the rate differential should more than offset possible prepayment penalties.
He may also want to pool the various existing loans to facilitate their management. Either by creating a banking union that centralizes the relationship with the company, or by substituting several contracts that are reimbursed in advance with a single contract. In the latter case, it will be necessary to plan to negotiate possible early repayment penalties.
Debt restructuring is often not just one motive
Debt restructuring operations can combine several of the motivations mentioned above:
Example 1: On the one hand, the company negotiates an extension of the repayment period of the existing debt. On the other hand, she takes out a new loan to finance an investment program. Result: the new annuity represents an amount identical to the previous one.
Example 2: A company with a healthy financial position plans a large investment program. It integrates its existing banks into a syndicate and negotiates new debt. The latter will repay the previous debts with an extended maturity and more favorable rate conditions in terms of margin.
What points of attention in negotiating restructuring?
The manager must be attentive, in renegotiating the bank's guarantee requests:
Contributions of associates' current accounts accompanied by a blocking agreement;
Minimum cash levels to be maintained in terms of investments with the loan bank, for example, a fixed minimum investment level with the bank in return for an MT loan;
Commitments provided for in the covenants, i.e. the levels of ratios to be reached on certain indicators: repayment capacity (Net debt / EBITDA), gearing ratio (Net debt / equity), financial expenses / EBITDA, distribution of dividends. Failure to comply with the expected level on the ratio could lead to the immediate repayment of the loan (cross default clause, infra);
Commitments provided for in the covenants, i.e. the levels of ratios to be reached on certain indicators: repayment capacity (Net debt / EBITDA), gearing ratio (Net debt / equity), financial expenses / EBITDA, distribution of dividends. Failure to comply with the expected level on the ratio could lead to the immediate repayment of the loan (cross default clause, infra);
Cross-default clauses providing for the lapse of the term of the loan and its immediate payment in the event of non-compliance with an obligation of the borrower.
The manager must, prior to any debt restructuring, build a financial forecast for MLT with a central scenario, and a degraded scenario. These scenarios will allow it to ensure the company's ability to meet the commitments requested by the bank, including ratios or covenants.
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