Tools Mid‑Sized Companies Can Use to Restructure Debt in Chapter 11
Rising interest rates, equipment payments, real estate loans or a temporary decline in revenue can leave an otherwise viable business unable to keep up with its debts. When individual negotiations with creditors are no longer enough, Chapter 11 can serve as a lifeline, letting the business modify secured loans, exchange debt for equity, sell assets and adopt a repayment plan, even over creditor objections.
Filing for Chapter 11 triggers an automatic stay that stops most collection actions, including lawsuits, foreclosures and repossessions. This gives the company the opportunity to put these tools to good use:
- Modification of secured loans — Depending on the value of the collateral and the circumstances of the case, the company may propose extending a loan’s maturity date, reducing its interest rate, changing the payment schedule or curing defaults over a longer period.
- Renegotiation of equipment and real estate loans — Heavy machinery, vehicles, inventory and accounts receivable are assets critical to a mid-sized company’s survival. But payments on loans secured by those assets may have become unmanageable due to a host of factors. Restructuring can allow the company to adjust payment terms, extend amortization or address defaults while retaining these essential properties.
- Debt-for-equity swap — Under this arrangement, a creditor receives an ownership interest in the reorganized business in exchange for the cancellation of some or all of its debt. A swap can conserve cash and improve the company’s balance sheet, but it can negatively affect the interests of existing owners. Careful valuation is needed to determine how much equity creditors should receive and whether the reorganized debt will be serviceable going forward.
- Asset sales — Section 363 of the Bankruptcy Code permits a company to sell assets with bankruptcy court approval. A company might sell an underperforming unit, excess real estate or unnecessary equipment. The process can generate cash, eliminate burdensome operations and preserve the viability of the business. Depending on the circumstances, the assets may be sold free and clear of any liens or other interests.
- Cramdowns — A bankruptcy court may confirm a Chapter 11 plan over certain creditors’ objections through a cramdown. This remedy is triggered when at least one class of creditors whose rights are impaired votes against the plan. The plan must not unfairly discriminate and must be fair and equitable to the objectors. For example, a secured creditor might retain its lien while receiving deferred payments over time that reflect the present value of its secured claim. Unsecured creditors must be paid value equal to the allowed amount of their claims,
These tools can be used separately or combined as part of a broad restructuring strategy. The objective is to give the company a sustainable foundation after it emerges from Chapter 11. An experienced bankruptcy attorney can help you create a detailed plan that speaks directly to your company’s needs.
The Law Offices of Michael Jay Berger in Beverly Hills represents businesses throughout Southern California in Chapter 11 proceedings with comprehensive guidance from start to finish. To schedule a free initial consultation, call 310-271-6223 or contact us online.
