Refinance Your Debt TEST

Last Updated Nov 19, 2008 6:54 PM EST

Balance sheet restructuring can take many forms, but it usually
means that companies renegotiate the terms of their debt or raise capital to
pay it down. It's a common undertaking during bankruptcy filings, but
when market conditions sour, many viable companies do a preemptive
restructuring to lower operating costs, conserve cash, and free themselves up
to focus on other aspects of business.


Balance sheet restructuring almost always includes
renegotiating debt terms or getting rid of debt (in exchange for equity, etc.),
but it can also address lease terms, contracts for equipment rental, or other
ongoing fixed costs.


Given the state of the banking industry, it's
tougher to refinance debt right now — but it's not
impossible. Steve Zuckerman, director of the special situations group at
Fairlie, Turner & Co. in Fort Lauderdale, Fla., says companies can arm
themselves to prepare for lender difficulty by demonstrating that they are
cash-flow positive. They can also make the case that if their loan terms aren't
refinanced, the alternative — the need to make divestitures, or other
dire steps — means the lender would stand to gain less. On the
upside, Zuckerman says mid-sized companies (those with revenue in the $25
million to $350 million range) do have decent refinancing opportunities now. "There's
more liquidity for mid-market businesses right now than for any other category,"
he says.


Restructuring isn't just a defensive tactic; it
can also be a smart move for companies looking to grow in lean times. In October,
Salt Lake City-based Fonix Corporation, a software company, announced that it
had reached an agreement with holders of $13 million worth of debt to exchange
that debt for company shares. Rather than worry about repaying the debt, the
company was able to trade it for equity and then pursue acquisition and
distribution deals. Roger Dudley, the company's president and CEO, called
the move "a key component to positioning Fonix for future growth"
and "a vote of confidence from our debt holders" regarding
the company's plans to acquire software developer G-Soft and
distribute its speech-related technologies on mobile devices like the Apple
iPhone.


Risks: Restructuring can take time and can also
result in charges to the balance sheet, especially if debt is retired outright
(in advance of new debt at better terms). Also, with terms of loans and other
costs in play, companies may miss out on strategic opportunities while
negotiating with other parties. Creditors may not cooperate. And, in a
bankruptcy situation, multiple constituencies may bicker over or contest the
restructuring plan.