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Business reconstruction to get through the crisis?

What is business reconstruction?

Business reconstruction is a common phrase in recent years. That's why the questions “what is restructuring” and “why should a business restructure” are very important concepts that the most majority of investors and business owners want to understand.

Restructuring is the process of organizing and rearranging a business based on the old structure of the business. This restructuring aims to overcome the internal weaknesses of the business. At the same time, this also gives directions for businesses to operate more effectively.

Normally, business reconstruction will be implemented comprehensively in all aspects from organizational structure, human resources, management mechanism, operation, finance... However, depending on the current situation of an enterprise where the business reconstruction plan can choose to overhaul the whole or only in a specific problem area.

When to restructure the business?

Restructuring is a difficult task because the natural mentality is to always resist change from the leader to the other members of the organization. Therefore, the most important thing in business restructuring is CHANGING THE MIND.

Restructuring is usually conducted when the enterprise's development is blocked such as disorientation, undefined business plan or strategy, inefficient team workers, or in a bad case forced to do in order to survive to avoid bankruptcy. There are many cases of restructuring in such forced circumstances that have helped businesses transform, but most businesses face many difficulties and even fall into failure.

A specific example is Ford's historic financial restructuring. In 2006, after a lot of difficulties, the company became a giant that was on the verge of recession and was in danger of having to merge or go bankrupt. At that time, CEO Alan Mulally - the hero of Ford Motor made a miraculous rescue when he successfully handled the crises within the company and secured a strong financial source. This helped Ford Motor, one of the three major car manufacturers at that time, not only overcome the company's own crisis but also overcome the worldwide crisis at the end of 2008 and grow up strongly in the world. While the remaining two giants have to file for bankruptcy protection.

Overview of business reconstruction with 3 main contents and aspects:

1. Restructuring business strategy, business model associated with enterprise's organizational model

2. Restructuring the management and operation system, aiming for enterprises to operate in a lean and efficient way

3. Financial restructuring to achieve a safe and optimal capital structure of the enterprise.

Objectively, for any enterprise, finance is always a very practical issue and causes headaches for investors. Corporate finance needs to be closely monitored and planned in detail, enterprises that want to be stable and develop need to have a strong financial resource, which is sufficient and timely for the proposed expansion plan project. Therefore, financial restructuring should be assessed and changed from time to time to meet the needs of enterprises, not until when it comes to a crisis.

Common difficulties of businesses

The Covid 19 pandemic has caused huge damaged impacts on economies around the world since the end of 2019. There are thousands of enterprises announcing bankruptcy every day, even the global giants. Most enterprises face a lack of capital, imbalance of capital sources, improper use of capital leading to inefficient production and business activities. Therefore, in the current crisis and epidemic situation, the problem of no revenue, no cash flow, loss of liquidity leading to the bankruptcy of many enterprises in the world. This situation is clear proof and a warning for the financial situation of the business.

Safe and appropriate financial structure?

A financial structure must ensure a mix of equity and debt. Through the financial structure, the enterprise is possible to generalize the funding policy, the safety in the use of assets, and the risk level.

The financial restructuring includes two basic contents:

  • Debt restructuring

  • Equity restructuring

In this article, we will delve into the specific aspect of "Financial Restructuring". In more detail, it is "Debt Restructuring" to understand better a part of identifying goals as well as methods to solve the financial issues in the enterprise.

Debt restructuring

Debt restructuring is an integral step of the corporate financial restructuring process. Debt restructuring is the process of organizing and rearranging the structure and size of debts of an enterprise. Debt restructuring is done more frequently and easier than equity restructuring. Debt restructuring usually takes place when an enterprise has financial difficulties leading to the inability to pay its due debts. However, when the business is doing well, debt restructuring can still take place, for example, the business can replace current debt with high-interest rates to debt with lower interest rates to reduce debt cost.

Debt restructuring includes three basic contents:

  • Debt restructuring process

  • Determine the level of debt that is appropriate to the size and growth rate of the enterprise

  • Develop an appropriate repayment plan.

The purpose:

  • Resolving outstanding debts in the past: When enterprises use high debt, business efficiency is low, most of the business profits are used to pay interest. If the business process continues like this without taking into account debt restructuring, the enterprise will only bring benefits to creditors, not to business owners. In addition, too high a loan balance will limit the ability to access new funding sources such as new loans, investment capital from owners for the purpose of operating expansion, alternative investment, technological innovation, fixed assets.

  • Accessing new sources of funding: To access new external financial sources such as foreign capital, the strategic partners require solving the debt problems of enterprises such as size, structure, and loan expenses. When these issues are resolved proactively, it will create trust for investors, positively impact the relationship between enterprises and banks.

  • Impact on the business restructuring process: Debt restructuring has a significant impact on the business restructuring process. Enterprises will face difficulties in the process of corporate restructuring and improving business efficiently if they do not carry out debt restructuring activities and resolve problem loans. Debt restructuring will form a sustainable debt structure that balances the interests of lenders (banks, suppliers) and borrowers (shareholders, employees). For viable enterprises, debt restructuring creates incentives for interest groups, helping enterprises survive and develop. For unviable enterprises, debt restructuring contributes to minimizing damage to interest groups. So, debt restructuring is a mandatory requirement in the process of corporate restructuring, as well as financial restructuring in order to improve enterprise operations.

Implementation methods

Negotiating to reduce the interest rate or to have exemptions: If interest expenses account for a large proportion of business profits that could make the enterprise's finance exhausted after many years of development. Enterprises need to negotiate with creditors to adjust their old borrowing interest rates to a lower or even zero level, thereby improving the solvency and operational efficiency of the enterprises.

  • Debt freeze: is a form in which the lender allows the borrower to "defer" the remaining outstanding loans, and the borrower will continue to repay the loan in the future according to the old agreements in the loan contract.

  • Debt rescheduling: the borrowing enterprise is allowed to defer payable debts and apply a new (longer) maturity time to the deferred debt at the same time.

  • Debt reversal: is a form of "borrowing to repay", the borrower takes out a new borrowing to repay the old borrowing. For enterprises with bad debts and inefficient business, they will not be able to perform debt reversal. Enterprises that do well but face high-interest rates during the tightening monetary period can be allowed to borrow new and pay old borrowings by banks, in order to clean up their accounting books and reduce cost pressure capital.

The methods of negotiating reduction, interest rate exemption, debt freezing, debt rescheduling and debt reversal are only short-term in nature and do not lead to a real fundamental change in corporate financial structure which could not meet the purpose of corporate financial restructuring. Enterprises need to implement new and more practical methods such as:

  • A debt/equity swap is a refinancing deal in which a debt holder gets an equity position in exchange for the cancellation of the debt. Creditors move from the role of lenders to the role of owners, participating in the business management and administration process. For enterprises, this activity helps to reduce the debt burden, improve solvency, increase financial autonomy and have the ability to access new sources of loan capital, thereby helping enterprises to gradually balance financial, stability and business development. In order for this method to be effective and have benefits to enterprises and creditors, it is necessary to enterprise measures to restructure, manage and orient the business development after the participation of new shareholders.

  • Diversifying forms of debt: There are many different types of debt such as supplier debt, bank borrowing, personal borrowing, corporate bond issue, financial lease. Each borrowing method has its own advantages and disadvantages. Depending on the business conditions of each enterprise, it is advisable to diversify funding sources from debt in order to best promote the advantages of each funding source.

In conclusion, the financial structure of an enterprise can be compared to the structure of a house, if the house has an unreasonable structure, life in that house will be uncomfortable. The higher the unreasonable level of the house structure, the more unstable life in the house is created. Thereby, enterprises should recognize the importance of "financial restructuring" in the sustainable development



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