Understanding Debt Restructuring: A Guide for CFOs
Debt restructuring has traditionally been seen as a last resort - something businesses do when they're running out of options.
But this view is outdated. Many Australian CFOs, financial controllers and accountants are now using debt restructuring as a strategic way to optimise their finances and create competitive advantages.
The Strategic Opportunity
Most businesses accumulate various debt facilities over time. Each made sense at the time, but now they may not be the best structure for your current needs. This is where strategic debt restructuring comes in. It's about optimisation, not survival.
Strategic restructuring focuses on enhancing liquidity and freeing up resources - creating more room for operations and growth, without the burden of inefficient debt.
When to Consider Restructuring
The best time to restructure is often when you don't need to. Consider it when:
Your business has outgrown its current facilities
You're paying higher margins than your risk profile justifies
Your debt structure is unnecessarily complex
Growth opportunities require a different capital structure
Market conditions create refinancing opportunities
High-interest debt is limiting your growth initiatives
You need to improve your borrowing capacity
Your financial ratios need strengthening
You feel restricted by your bank or lender relationship
Key Elements of Successful Restructuring
1. Know Your Numbers
Australian lenders are increasingly sophisticated in their risk assessment - your approach should match this sophistication. This means a comprehensive evaluation of your financial position, not just surface metrics.
2. Market Timing
RBA rate decisions and market cycles create windows of opportunity. Understanding these dynamics is crucial for optimal timing.
3. Lender Relationships
Your existing lenders know your business. It's worthwhile having a conversation with them - but it is just as important to avoid getting stuck in a rut with the wrong lender. Transparent communication during this process is key to maintaining trust.
Understanding Your Options Today's restructuring landscape offers quite a few options:
Term Modifications: Extending periods or adjusting payment schedules to match cash flow patterns
Interest Rate Restructuring: Moving between fixed and floating rates, or negotiating better margins
Facility Consolidation: Streamlining multiple facilities into a more efficient structure
Security Restructuring: Realigning security arrangements to free up assets or create operational flexibility
4. Forecasting Growth
Knowing the business’ position will change for the better is a great time to explore alternate lending options. By waiting for the bank’s annual review you are being put at a disadvantage of up to 12 months which was have serious cashflow and working capital implications.
Key Considerations Documentation
Quality documentation isn't just about compliance - it's about making sure your restructure meets the goals you've set, that you're looking to achieve. Detail matters. This includes clear terms, legal considerations, and ongoing monitoring requirements.
Covenants
Modern loan agreements come with increasingly sophisticated covenant packages. Understanding these is crucial for maintaining operational flexibility.
Market Changes
The Australian lending market continues to evolve. Non-bank lenders, private capital and fintech solutions are creating new opportunities. Your optimal structure today might look very different from a few years ago.
The Process
Successful restructuring starts with a thorough analysis. You'll need:
A clear picture of your current debt landscape
Solid forecasts of future performance
A well-structured proposal for lenders
Regular monitoring systems post-restructure
Common Challenges
Restructuring can be complex, with multiple moving parts to manage simultaneously. Understanding these challenges upfront helps create better outcomes.
The Stakeholder Balancing Act
Different parties bring different priorities to a restructure. Lenders focus on security and returns, shareholders on growth, management needs flexibility, and suppliers want payment certainty.
Compliance: More Than Just Paperwork
Don't underestimate the compliance burden. You need to keep business momentum while managing documentation, reporting requirements and regulatory obligations.
The Timing Challenge
Timing matters, especially now. With interest rates and market conditions shifting, success often comes down to watching trends and moving at the right moment.
Getting the Framework Right
The temptation to rush through paperwork to complete a deal can create future problems. Getting monitoring systems right from the start prevents issues down the track.
Coordinating Multiple Players
Lawyers, accountants, valuers, advisors and stakeholders all need to be organised. Getting everyone aligned and moving forward takes a big effort.
If your debt structure hasn't been reviewed in the past 18 months, you're probably missing opportunities for optimisation.
Our team can help you review your current arrangements and find potential improvements.
Contact our debt advisory team for a confidential discussion, or call 1300 310 761