Corporate debt restructuring and bankruptcy reorganization are two options companies have when facing financial distress. While there are some similarities between the two, there are important differences that companies should understand when weighing their options.
Corporate debt restructuring involves a company working with its creditors to renegotiate the terms of its debt outside of court. The goal is to come to an agreement that allows the company to continue operating while paying down what it owes over time.
Some key things that may happen in a debt restructuring include:
The overall aim is to reduce the company’s debt burden to a more manageable level so it can get back on sound financial footing (similar to bankruptcy reorganization).
Bankruptcy reorganization, also called “restructuring bankruptcy”, allows a company to restructure its debts under court supervision. The most common type for larger corporations is Chapter 11 bankruptcy.
In Chapter 11 the company files a “reorganization plan” that lays out how it will repay creditors over 3-5 years. As with out-of-court restructurings, the goal is to emerge with a lighter debt load the company can afford.
However, there are some major advantages unique to Chapter 11 bankruptcy:
Upon filing for Chapter 11, an automatic stay goes into effect that halts collections by creditors. This prevents things like foreclosures, repossessions, garnishments, and lawsuits while the company works on its reorganization plan (see details here).
For a reorganization plan to take effect, it must be approved by creditors and confirmed by the bankruptcy court. This court oversight provides checks and balances on the restructuring process.
Under Chapter 11, companies can cancel contracts, leases, and other agreements deemed overly burdensome. This allows rejecting disadvantageous agreements to lower expenses.
Companies in Chapter 11 can take out loans and receive financing not otherwise available to distressed businesses. This “debtor-in-possession” financing helps fund operations during restructuring.
While corporate debt restructuring and Chapter 11 bankruptcy aim for similar outcomes, they have some important distinctions:
|Chapter 11 Reorganization
|Federal Bankruptcy Court
|Requires Consent of All/Most
|Can Force Plan on Dissenters
|Typically Few Months
|6 Months – 2+ Years
|Lower Fees and Costs
|Higher Fees and Administrative Expenses
|Full Control Retained
|Major Decisions Require Court Approval
So in weighing corporate debt restructuring vs. bankruptcy, companies need to consider factors like needed creditor concessions, speed, and how much court intervention they are willing to accept.
For some companies, negotiating with lenders outside of Chapter 11 makes more sense. Reasons why out-of-court restructuring may be the best path include:
Essentially if consensus can be reached with creditors informally, bankruptcy can potentially be averted entirely through debt renegotiation.
However, for many distressed corporations Chapter 11 provides tools and benefits not accessible outside bankruptcy. Reasons to consider a formal reorganization include:
If it seems unlikely for all or sufficient creditors to agree on out-of-court concessions, bankruptcy may be necessary. The Chapter 11 process includes cram-down provisions to approve plans without unanimous consent.
With Chapter 11, struggling businesses can get approved for debtor-in-possession financing not available otherwise. This can help address urgent cash issues.
If best projections show it will take 2-3 years or more before finances stabilize, Chapter 11 allows this time. Debt holders can be forced to accept extended repayments.
If the company needs to cancel leases, supply agreements, or other onerous contracts, Chapter 11 provides the best mechanism. The court can allow rejecting harmful contracts.
If creditors seem likely to force a liquidation through aggressive collections, filing for court-overseen Chapter 11 can halt this.
So for companies needing broad concessions, time, and legal tools to implement changes, formal bankruptcy reorganization is often the better route.
Both corporate debt restructuring and Chapter 11 bankruptcy reorganization offer ways for distressed companies to reduce debt and become financially viable again. Out-of-court restructurings provide faster and lower-cost options but require near-unanimous creditor consent. Chapter 11 gives legal tools to implement broad changes without full consent but is slower and more expensive.
In choosing between the two options, companies need to weigh factors like the willingness of creditors to negotiate, the urgency of cash issues, the expected timeline to profitability, and the need to cancel contracts. With the right advisors helping analyze the pros and cons, companies can determine if informal debt renegotiation or formal bankruptcy reorganization better fits their situation.
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