The emergence of Debt Mediation and Debt Restructuring for Cyprus businesses
By Rakis Christoforou BBA, CPA/ABV/CFF, MCSI, CGMA, ACFE
Debt mediation is becoming a primary means for individual and small to medium size companies to refinance as the market for lines of credit and direct borrowing have shrunk dramatically. The use of debt mediation can be cost effective, to help end or avoid litigation and is highly preferable to filing for bankruptcy as it gives another chance for once successful businesses to recapture that success.
Debt restructuring refers to either the change/reallocation of facilities (usually between overdraft and loans) granted by a financial institution to a company/individual or change in the terms of loan extension to enable the debtor to pay back the loan to his or her creditor. Debt restructuring is an adjustment made by both the debtor and the creditor to smooth out temporary difficulties in the way of loan repayment. Debt restructuring is of two types, and there are many ways to carry out the restructuring process.
DEBT RESTRUCTURING: TYPES
Debt restructuring is of two kinds, depending on the terms and the cost to the debtor.
1) General Debt Restructuring/Mediation: Under the terms of general debt restructuring, the creditor incurs no losses from the process. This happens when the creditor decides to extend the loan period, or lowers the interest rate, to enable the debtor to tide over temporary financial difficulty and pay the debt later.
2) Troubled Debt Restructuring: Troubled debt restructuring refers to the process where the creditor incurs losses in the process. This happens when the debt restructuring leads to reduction in the accrued interest, or due to the dip in the value of the collateral, or through conversions to equity. This type of restructuring should be avoided and should be used only as a last resort.
This type of debt restructuring is not widely used in some countries, including Cyprus, but I strongly believe that the time has come to see more use of this method if some otherwise viable businesses are to survive this financial crisis. After all, helping an otherwise healthy company remain in business is for the best interest of both the debtor and the creditor (i.e. financial institution). It is a win-win situation.
HOW TO PLAN DEBT RESTRUCTURING:
1) The financial institution or crediting company should prepare a roadmap for the debt restructuring process. The strategy should include the expected time to be taken to recover the debt, the terms of loan repayment, and watching closely the financial performance of the debtor.
2) The decision of the financial institution regarding the debt restructuring should depend on whether the debtor has invested a substantial proportion of his income or personal property (cash or other assets including real property) in the company compared to the total facilities granted by the financial institution. In this case, the debtor has much to lose in case of bankruptcy and would therefore do his best to save the company.
3) Making a cash flow projection is also important to the debt restructuring process. It is advisable not to include uncertain cash flow estimates in the plan.
4) The debtor's financial situation should also be considered while making a debt restructuring plan. The debtor's ability to repay the loan depends on his or her financial management, so the financial company needs to look into the debtor's roadmap for repaying the loan. If the debtor is another company, then changing the key management associated with it might help.
Debt restructuring depends on many factors like the debtor's financial management, the projected cash inflow, the relation between the debtor and the creditor, etc. Debt restructuring is meant to help both parties. It involves compromises made by the creditor as well as the debtor to ensure that the loan is repaid in full to the creditor without too much of a financial loss to the debtor.
Many companies and individuals in Cyprus should be planning to go for debt mediation or restructuring because there is no other way to cope with the present economic situation. Financial institutions should at the same time understand that if they are to remain in business they have to find ways to help companies and borrowers properly restructure their debts.
However, in order to be successful in this important step, companies and individuals need to have proper financial consultation by experienced professionals otherwise they may lose the opportunity to save their business and/or their personal property.
Rakis Christoforou is the founder and director of RC Business Valuation & Forensic Accounting Ltd, the first company in Cyprus specialising in the Debt Mediation or Restructuring process. Contact email@example.com or visit www.businessvaluations.info
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