Contents
Debt restructuring
· Modification of the terms of a loan to provide relief to a debtor (a person who owes money) (borrower) who could otherwise default on payments.
· The restructuring may involve extending the period of repayment, reducing the total amount owed, or exchanging a portion of the debt for equity in the debtor company.
· Debt restructuring often occurs when a person or company has taken on too much debt and is in danger of bankruptcy.
· Debt restructuring is beneficial to the person or company requesting it because it often results in a significant discount and/or a more flexible repayment schedule. It is usually less expensive than a bankruptcy would be.
· Likewise, it is beneficial to the creditors because a bankruptcy will likely result in some debt being discharged (something better than nothing); creditors generally prefer debt restructuring because they would rather be paid less than not paid at all.
Debt-for-equity swap
· A situation in which a debtor (which is a company) replaces the debt held by one or more creditors with a percentage of ownership in the company.
· A debt-equity swap often occurs if the company would otherwise be unable to repay the creditor(s) anything without going bankrupt.
· However, the swap may be a result of change from a debt-based to an equity-based capital structure.
· In either case, these swaps are often considered part of a company's attempt to restructure itself.
Refinance
· Refinancing is the process of paying off an existing loan by taking a new loan and using the same property as security.
· Refinancing can allow one to secure a lower interest rate; for example, one can replace a loan at an 8.5% rate with one at 5.5%.
· Homeowners may refinance to reduce their mortgage expense if interest rates have dropped, to switch from an adjustable to a fixed rate loan if rates are rising, or to draw on the equity that has built up during a period of rising home prices.
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