Debt restructuring is the process of reorganising a business debt obligations to better align repayment commitments with current and projected capacity.
Debt restructuring modifies the terms of existing debt agreements. This may include extending maturity, reducing interest rates, changing repayment schedules, converting debt to equity, or consolidating multiple facilities into a single structure.
When a business cannot keep up with its debt payments, debt restructuring renegotiates the terms so the business can survive and eventually repay what it owes. Both sides make concessions to avoid the worse outcome of default.
A business owes ₹100 crore to multiple lenders with varying maturity dates. Facing a cash crunch, it proposes consolidating the debt into a single facility with a longer maturity, slightly lower interest rate, and a two-year moratorium on principal repayment.
Original debt service: ₹20 crore annually. Restructured terms: interest only for two years, then reduced principal of ₹12 crore annually for eight years. This provides immediate relief while ensuring eventual repayment.
Debt restructuring is often necessary when a business faces temporary stress but has a viable underlying operation. The key question is whether the restructured business can generate sufficient cash flow to meet new obligations.
Early action is critical. Businesses that address debt stress proactively have more options and better outcomes than those that wait until default is imminent. Lenders generally prefer restructuring over recovery through insolvency.