Management and re-structuring of the enterprise during crisis and bankruptcies.Sanitation, transformation and liquidation of the enterprises.

Restructuring is the corporate management term for the act of reorganizing the legal, ownership, operational, or other structures of a company for the purpose of making it more profitable, or better organized for its present needs. Other reasons for restructuring include a change of ownership or ownership structure, demerger, or a response to a crisis or major change in the business such as bankruptcy, repositioning, or buyout. Restructuring may also be described as corporate restructuring, debt restructuring and financial restructuring. Executives involved in restructuring often hire financial and legal advisors to assist in the transaction details and negotiation. It may also be done by a new CEO hired specifically to make the difficult and controversial decisions required to save or reposition the company. It generally involves financing debt, selling portions of the company to investors, and reorganizing or reducing operations. The basic nature of restructuring is a zero sum game. Strategic restructuring reduces financial losses, simultaneously reducing tensions between debt and equity holders to facilitate a prompt resolution of a distressed situation. Corporate debt restructuring is the reorganization of companies’ outstanding liabilities. It is generally a mechanism used by companies which are facing difficulties in repaying their debts. In the process of restructuring, the credit obligations are spread out over longer duration with smaller payments. This allows company’s ability to meet debt obligations. Also, as part of process, some creditors may agree to exchange debt for some portion of equity. It is based on the principle that restructuring facilities available to companies in a timely and transparent matter goes a long way in ensuring their viability which is sometimes threatened by internal and external factors. This process tries to resolve the difficulties faced by the corporate sector and enables them to become viable again.Steps:

- ensure the company has enough liquidity to operate during implementation of a complete restructuring

- produce accurate working capital forecasts

- provide open and clear lines of communication with creditors who mostly control the company's ability to raise financing

- update detailed business plan and considerations

Valuations in restructuring In corporate restructuring, valuations are used as negotiating tools and more than third-party reviews designed for litigation avoidance. This distinction between negotiation and process is a difference between financial restructuring and corporate finance.[1]

Tasks of Restructuring Corporate restructuring on a large scale is usually made necessary by a systemic financial crisis—defined as a severe disruption of financial markets that, by impairing their ability to function, has large and adverse effects on the economy. The intertwining of the corporate and financial sectors that defines a systemic crisis requires that the restructuring address both sectors together.

Restructuring the Financial Sector Even after the foundation has been laid, corporate restructuring cannot begin to make headway without substantial progress in restructuring the financial sector. The draining of bank capital as part of the crisis will usually lead to a sharp cutback in lending to viable and nonviable corporations alike, worsening the overall contraction. Moreover, banks must have the capital and incentives to play a role in restructuring. The first task of financial restructuring is to separate out the viable from the nonviable financial institutions to the extent possible. To do this work, financing and technical assistance from international financial institutions can be helpful, as in Indonesia following the 1997 crisis. Nonviable banks should be taken over by the government and their assets eventually sold or shifted to an asset management corporation, while viable banks should be recapitalized. Banks should be directly recapitalized for normal operation or else, in the absence of strong competitive pressures, they may impede recovery by recapitalizing themselves indirectly through wide interest rate spreads. At the same time the government should ensure that bank regulation and supervision is strong enough to maintain a stable banking sector. There is a degree of circularity here in that the separation of viable from nonviable banks is helped by completion of the same task for corporations, which itself is aided by financial restructuring. The best way to close this circle seems to be rapid restructuring of the banks because a cutback in bank financing to corporations amplifies the overall contraction, and has irreversible consequences—such as the sale of assets too cheaply.

Restructuring the Enterprise Sector Corporate restructuring can begin in earnest only when banks and market players are willing and able to participate. As with the financial sector, the first task is distinguishing viable from nonviable corporations. Nonviable corporations are those whose liquidation value is greater than their value as a going concern, taking into account potential restructuring costs, the "equilibrium" exchange rate, and interest rates. The closure of nonviable firms ensures that they do not absorb credit or worsen bank losses. However, the identification of nonviable corporations is complicated by the poor overall performance of the corporate sector during and just after the crisis. Viable and nonviable firms can be identified using profit simulations and balance sheet projections, as well as best judgment. Liquidating nonviable corporations during a systemic crisis usually requires the establishment of new liquidation mechanisms that bypass standard court-based bankruptcy procedures. The bankruptcy code of the United States can be taken as the standard minimal government involvement approach. In practice, however, this code has a strong liquidation bias—some 90 percent of cases end in liquidation, and reorganization takes a long time. Moreover, courts are usually unable to handle a large volume of cases, lack expertise, and may be subject to the influence of vested interests. Giving debtors protection from bankruptcy during mediation proceedings allows corporations that are later judged to be viable to remain operating and enables the orderly liquidation of nonviable corporations. If debtors are protected from bankruptcy, however, monitoring of the corporations is needed to ensure that incumbent managers do not hive off the most profitable assets. Liquidation can be speeded up by special courts or new bankruptcy laws. Hungary introduced a tough bankruptcy law in 1991 under which firms in arrears were required to submit reorganization plans to creditors; if agreement was not reached, firms were liquidated.

Date: 2015-01-29; view: 970