Debt Restructuring
AdvancedDebt restructuring is the renegotiation of a borrower's existing debts, such as reducing the amount owed, lowering interest rates or extending repayment periods, typically to avoid default or to recover from financial distress.
When a borrower can no longer meet its debt payments, it may negotiate new terms with its creditors. Debt restructuring is used by governments, companies and individuals.
For governments, restructuring typically involves exchanging old bonds for new ones with lower face values, longer maturities or lower interest rates. Creditors accept losses in exchange for a higher chance of being repaid at least partly. For example, a country might exchange bonds worth 100 for new bonds worth 60, maturing ten years later.
Sovereign restructurings can be complex because there is no international bankruptcy court. They often involve the International Monetary Fund, official creditors such as other governments, and private bondholders. Collective action clauses in bond contracts allow a majority of bondholders to approve a restructuring that binds all holders, preventing a few holdouts from blocking a deal.
Restructuring can give a borrower breathing space, but it usually damages creditworthiness and makes future borrowing more expensive.
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