Restructuring or refinancing a debt?

by author
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My interest in writing about refinancing or restructuring a debt is generated by the current situation.

Currently Peru is going through a difficult economic situation:

the country’s most important trading partners are practically stagnant, the United States and China continue to fuel rumors of a trade war,
The prices of raw materials (including metals) are close to their lowest in several years,
To this we add the “recent” institutional and political instability of the country,
It should come as no surprise that Peru’s growth projections for this year and the next have recently been revised downwards (the IMF estimates 3.7% for 2019).

Let us also not forget that this macroeconomic context has an almost immediate effect on our companies (unless we are in a sector or market that has a certain “shield” from macroeconomic effects):

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  • Non-compliance with budgets.
  • profit margins are beginning to adjust.
  • fixed costs begin to tighten cash flow.
  • The assumptions used to invest in that project or undertaking a few years ago are no longer valid.
  • The payment of the schedule of that loan that we use to finance the project or the operation of the company is becoming increasingly difficult to meet, among others.

What do we do in this situation?

The first thing is to analyze the factors that are affecting your business (perhaps with the help of an external consultant) and analyze among other things:

  • Are they temporary factors that will be reversed in the short term or are they structural changes that require a review of the strategic plan?
  • Is my business or my project still viable?
  • Can I reduce my level of expenses in the short term?
  • How can I optimize the use of my financial resources with a better management of working capital?
  • Do I have immobilised assets that I can dispose of if required?

All the answers to these and other questions, which clearly respond to the business and its ability to continue generating (economic) value, must be reflected in an action plan that must also include a projection of the company’s financial statements, especially the flow of box.

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It is likely that after this analysis you have realised that:

  • The company’s cash flow is negative and
  • That part of this effect is the product of the payment of the financial debt to the banks.

Restructure and / or refinance my debt?

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Restructuring and refinancing are similar concepts in that they are usually associated with variations in the original conditions of a loan requested by companies when their generation of flows does not allow them to meet the payment, however a company can also restructure and / or refinance When a debt goes through a positive situation, this allows it to take advantage of better market conditions, negotiate better rates, establish looser covenants, increase the average duration of its debt, among others.

The main difference is that when talking about a restructuring, it usually refers to the change in the debt structure such as term, grace periods, installments, currency; while refinancing is usually used to refresh debt by canceling old loans with a new operation.

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