How to Negotiate with Creditors in a Debt Restructuring
A company that sits down with creditors unprepared loses not because of the size of the debt but because of the uncertainty it brings to the table. What a lender fears most is not knowing.
What to do before sitting down
Before meeting creditors, the company needs a realistic calculation of its own debt-carrying capacity: how much cash each scenario generates, and whether current debt can or cannot be serviced under those scenarios.
Sitting down without this work invites the creditor to impose its own analysis instead, and a creditor's scenario is almost always more pessimistic than the company's.
What a creditor wants to see
A creditor first looks at whether the company acknowledges the problem. An early, transparent approach is received far better than a delayed, defensive one.
Second, it wants a credible recovery plan: what operational steps are being taken, which assets could be disposed of, whether shareholders are putting in additional capital. An approach asking only for a maturity extension is received poorly.
The order of negotiation
With a single creditor the process runs bilaterally. With multiple banks, a coordinating bank is usually appointed and the process is frozen for a defined period under a standstill agreement.
During the standstill an independent review is commissioned; it establishes both the company's real capacity and a common ground creditors can agree on.
Restructuring tools
Maturity extension, interest deferral, principal reduction (a haircut), debt-to-equity conversion and new security are the most common tools; several are usually applied together.
Which tool is used depends on the company's long-term debt-carrying capacity; extending maturity alone, without fixing capacity, only postpones the problem.
The most common mistake
The most common mistake is sitting down with an optimistic scenario and promising a recovery that does not materialise within a few months. That damages trust permanently by the second meeting.
The second common mistake is making different commitments to different creditors; a lack of coordination leads one creditor to reject a concession another has already accepted.
Special SituationsIn stressed balance sheets, partner separations and periods of transformation we set out the options realistically and run the process.
Learn moreFrequently asked questions
What is a standstill agreement?
It is a creditor's commitment, for a defined period, not to enforce or cut existing facilities. During that period the company and the creditor work toward a lasting solution alongside an independent review.
When does a haircut come onto the table?
It comes up once it is clear the company cannot repay the debt in full under any realistic scenario; lighter tools such as maturity extension and interest restructuring are tried first.
How is the process managed with multiple banks?
Usually one of the largest creditor banks is appointed coordinator, a joint standstill is signed, and all banks act on the findings of the same independent review.
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