The main costs associated with debt restructuring are the time and effort spent negotiating with bankers, creditors, vendors, and tax authorities.
In 2010 debt mediation has become a primary way for small businesses to refinance in light of reduced lines of credit and direct borrowing.
Debt mediation can be cost-effective for small businesses, help end or avoid litigation, and is preferable to filing for bankruptcy.
While there are numerous companies providing restructuring for large corporations, there are few legitimate firms working for small businesses.
As a consequence, the original shareholders' stake in the company is generally significantly diluted in these deals and may be entirely eliminated, as is typical in a Chapter 11 bankruptcy.
[5] Economist Jeffrey Sachs has also argued in favor of such haircuts: "The cheaper and more equitable way would be to make shareholders and bank bondholders take the hit rather than the taxpayer.
"[6] If the key issue is bank solvency, converting debt to equity via bondholder haircuts presents an elegant solution to the problem.
Taxpayers do not have to contribute dollars and the government may be able to just provide guarantees in the short term to buttress confidence in the recapitalized institution.
[7] A 20% haircut would reduce this debt by about $54 billion, creating an equal amount of equity in the process, thereby recapitalizing the bank significantly.
[10] CCAA filings were created by the Companies' Creditors Arrangement Act, a piece of legislation first put forward and passed in 1933 and updated later in 1985.
[11] A CCAA filing allows a Canadian company to have a window in time (typically between 30 and 90 days) in which they can renegotiate and reorganize their debt payment plans with creditors.
[15] Chapter 12 Bankruptcy is a form of debt restructuring in the United States available to farms and fisheries exclusively; said businesses could be family-owned or owned by corporations.
[16] Food commodity prices were caught in a downward spiral in the years leading up to 1986, pushing U.S. farmers' debts to levels above $200 billion.
[19] Farms and fisheries, being midsize and seasonal in nature, were thus in need of a more flexible legal framework through which they could restructure their debts.
Out-of-court restructuring, or workouts, constitute consensual agreements between firms and their creditors to adjust debt obligations, mainly for the purpose of evading the costly legal fees associated with Chapter 11.
[21] The decision as to whether to enter a workout or take the issue into court is, in large a part, a function of the creditors' and debtors' respective perceptions of how much can be gained or lost through a Chapter 11 proceeding.
[23] As the incidence of corporate failures has increased in part due to current economic climate, so a more "standard" approach to restructuring has developed.
This triggers a gathering of creditors and other stakeholders, in anticipation of a breach of financial covenants, a crisis of liquidity, or impending debt instruments coming due that will not be able to be refinanced, all of which could be the impetus for a bankruptcy taking place if not rectified.
Innovation in financial restructuring: Focus on signals, processes and tools, Vurtus Interpress, Marco Tutino and Valerio Ranciaro, 26 April 2020