Debt restructuring is asking all of your financial institutions for some forbearance for you, the borrower. The forbearance can take many forms, but it's designed to match your cash flow with your debt service over a fixed period of time to keep your business moving forward.
Restructures can be short term (interest only for 90 days), or they can be long term (total rework of your debt for a new term). It can be a change in interest rate, it can be adding to the term of your loan, or it can involve collateral swaps, reduction in fleet, and even adding additional fleet.
Each and every restructure is based on the individual client's current debt and their ability to pay back the debt in full. The task of doing a debt restructure takes time and can be a very daunting project while you are trying to drive your business through these very difficult times.
The planning process
The first step in planning for debt restructure is to have a solid understanding of your monthly cash position as it stands today. None of us know when this recession or downturn is going to end, so don't guess. In your cash flow analysis, assume it's not going to end for a few years.
Next, review all of your cost lines to see what you can eliminate, review all of your revenue lines and see what revenues you are missing, and then take a realistic view of what you can afford to pay in debt service.
The next step is to have a fair understanding of the value of your fleet. An appraisal can be done yourself or through a third party, but it must reflect a simple, common-sense appraisal of reasonable market values.
Once you have completed these steps, you can put together a forecast for your company and a restructured debt payment plan which can be presented to your lender (our average client is involved with 18.6 banks, so this is not an easy task and can be quite laborious).
At this point, the debt restructuring process - and the development of your presentation - can become extremely time consuming and you will likely need outside help.
When you retain a professional to assist you in the restructuring of your debt, it usually takes about four weeks to gather all the financial information (depending on what rental software you are using), assess the rental operations performance, build a viable and sustainable cash flow model, determine the type of bank restructure you are going to request, and prepare a presentation to your lenders.
If you were to do it yourself, the process would no doubt take even longer, and would prevent you from focusing on the things you do best, such as serving customers. To understand the problems with doing your own debt restructure, ask yourself the following questions:
- Do I have the time?
- Do I really know how creditable I am with my banks?
- Do I have a relationship with the person who is going to drive my request through the proper channels? Do I know who the decision maker is?
- Am I dealing with a collector?
- Am I dealing with the litigation group at my bank?
- Are my forecast projections realistic and how much time did it take me to do a proper forecast?
- What's going to be the reaction of my banker when I say, "well, everyone else is in the same boat"?
- What will my restructure look like? Is it comprehensive enough? Are the right details in place?
- What impact will it have on the bank's collateral position?
- What is the bank's current collateral position before restructure?
- How much in fees is the bank going to charge?
- Will the bank increase my interest rate?
There are lots of reasons rental business owners go to professionals to assist in their debt restructure and the cost is usually offset by the amount of revenue you could lose by taking your eye off the revenue-generating side of your business.