CDR- Importance

When a corporate is having severe financial

crisis in terms of :

 Trouble in repaying it’s debt obligation

 Inability in timely servicing of it’s interest

It generally resorts to Corporate Debt

Restructuring Mechanism
 CDR- Definition

 Corporate Debt Restructuring is basically a mechanism by

way of which company endeavors to reorganize its
outstanding obligations.

 The reorganization of the outstanding obligations can be

made by any one or more of the following ways:
 Increasing the tenure of the loan
 Reducing the rate of interest
 One time settlement
 Conversion of debt into equity
 Converting unserviced portion of interest into term loan
Objectives of CDR

 By way of CDR there is a hope of preservation

of Viable corporate that are affected by
certain internal & external factors

 CDR aims at minimizing the losses to

creditors & other stakeholders through an
orderly & coordinates restructuring program

 To support continuing economic recovery

CDR – Borrower’s Point of
View
When a company is having outstanding debts
which cannot be serviced under its existing
operations it can resort to any of the following
courses of action:
 Enhance its quantum of Debt with an expectation
to increase its Profitability & to pay off its original
debt, however the company may not be able
sustain such enhanced level of debt.

 Cease the current operations of the company &

undergo winding up, so this will ultimately lead to
unnatural death of company
CDR- Lender’s perspective

 CDR gives the lenders a unique opportunity to avoid being

encumbered with NPA’s.

 The primary interest of lenders always lies in recovering the

principle amount lent to corporate along with returns on that
investment & not in liquidation of assets

 Apart from this Liquidation proceedings are notorious for yielding

low returns for creditors

Therefore, CDR becomes an instrument for the lenders, i.e. the banks,
- to aid the transformation of otherwise Non-Performing Assets
into productive assets.
Borrower’s classification:

 Class – A comprises companies affected by external factors

pertaining to economy and industry.

 Class –B borrowers are such corporates/promoters who,

besides being affected by the external factors, also have
weak resources, inadequate vision and do not have support of
professional management.

 Class-C borrowers are overambitious who have diversified into

related/unrelated fields with/without lenders’ permission.

 Class-D are financially undisciplined borrowers.

 Financial Distress

A situation where a firm’s operating cash flows are

not sufficient to satisfy current obligations and the
firm is forced to take corrective action.

 Insolvency is a term which generally means an

inability to repay debts.
 Stock-based insolvency
 Flow-based insolvency
 Definition of Terms
 Financial Distress
 Includes default and bankruptcy, but also
 Threat of default or bankruptcy and its effect on the company
 Definedto capture the costs and benefits of using large
amounts of debt finance
 Default
 Failure to meet an interest payment, or
 Violation of debt agreement
 Bankruptcy
 Formal procedure for working out default
 Does not automatically follow from default.
 What happens in Financial
Distress
 Financial distress does not always result in the termination of
the firm (is the firm better alive than dead?)

 Firms deal with financial distress in a variety of ways

 Asset restructuring includes actions such as:
 Selling off assets
 Cutting back R&D and capital spending
 Merging with another firm
 Financial restructuring may involve:
 Cutting dividends
 Issuing new securities
 Negotiating with creditors
 Exchanging debt for equity
 Filing for bankruptcy