Financial reconstruction refers to the process of revamping or restructuring a company’s financial situation to improve its viability and profitability. This can be necessary when a company faces significant financial difficulties that cannot be resolved through other measures, such as cost-cutting.
Financial reconstruction aims to help companies become more financially stable and sustainable by addressing issues such as excessive debt, poor cash flow management, and ineffective financial management.
Why Companies Go for Financial Reconstruction?
When a company cannot pay its cash obligations – for example, when it cannot meet its bonds payment or its payments to other creditors it goes bankrupt.
In this case, a company can choose to shut down its operations and walk away. On the other hand, it can also restructure and remain in the business.
The process of financial reconstruction (reconstruction) can be thought of as two types. These are financial reconstructing and organisational reconstruction.
Reconstruction from the financial viewpoint involves renegotiating payment terms on debt obligations, issuing new debts and reconstructing payables to the vendors. Bankers guide the firm by recommending the sale of assets, issuing special securities such as convertible stocks and bonds, or even selling the company entirely.
From an organisational viewpoint, reconstructing can involve a change in management, strategy and focus. “I-bankers” with expertise in “reorge” can facilitate the ease and transition from bankruptcy to viability. Typical fees in reconstructing depend on whatever retainer fees are paid upfront and what new securities are issued post-bankruptcy.
When a bank represents a bankrupt company, work is focused on analysing and recommending financing alternatives. Thus, the fee structure resembles that of the private placement. How does the work of private placement differ? I-Bankers not only work in securing financing but may also assist in building projections for the client, renegotiating the credit terms with lenders, and helping to re-establish the business as a going concern.
Because a firm in bankruptcy already has substantial cash flow problems, investment banks often charge nominal monthly retainers, hoping to cash in on the spread from issuing new securities. Like other public offerings, it can be a highly lucrative and steady business.
The goal of financial reconstruction is to help a struggling company overcome its financial challenges and pave the way for long-term stability and growth. It is a complex and meticulous process that requires a deep understanding of financial principles and careful analysis of the company’s current situation. By implementing effective financial reconstruction strategies, companies can enhance their financial standing and regain their competitive edge in the market.