Debt restructuring and refinancing helps businesses: lowers costs, increases cash flow, and gets capital for improvements, investments, acquisitions.

• Author: Barbour, Tracy
• Position: FINANCIAL SERVICES

A fluctuating economic climate and persistently-low interest rates are prompting a broad mix of Alaska businesses to refinance and restructure their existing debt.

Debt restructuring and refinancing are very similar terms, but they convey slightly different shades of meaning.

A refinance involves paying off debt with the proceeds from a new loan that is usually the same size and uses the same property as collateral. "Refinancing typically means we are revising an existing facility, which can mean restructuring the interest rate and extending the term and amortization," says KeyBank Commercial Banker Tracy Morris. "Additionally, the client can extract equity to purchase assets, get working capital, and do an acquisition."

Refinance options for businesses are typically driven by the kind of collateral or purpose that is driving the financing, says Allen Hippier, a commercial loan officer with Northrim Bank. For example, Northrim has different refinance options for debt linked to short-term assets like inventory and accounts receivables, as well as for longer-term fixed assets such as equipment and real estate.

A refinance simply changes the way debt is paid, Hippier says. And it entails looking at the entire structure of a company financially. "A good refinance will, if possible, restructure debt so it is best matching the needs of the business," he says.

Debt restructuring is generally a process that enables a company or entity facing cash flow problems and financial distress to reduce and renegotiate delinquent debts to improve liquidity so it can continue operating. Debt restructuring carries a negative connotation with the average person because it is often associated with financial hardship. Restructuring debt, which has historically been an instrument of large corporations, is usually a less expensive alternative to bankruptcy.

In the realm of commercial financing, however, debt restructuring is considered to be a positive tool that can benefit businesses of all types and sizes, according to Chad Steadman, a vice president and regional unit manager with First National Bank Alaska. "When it comes to restructuring, they might be looking at the balance sheet of their company to see if they can take some debt from one place and put it somewhere else," Steadman says. "Maybe they want to take a line of credit that should be for short-term use and restructure it into a longer term. I'm thinking of my balance sheet and how I can better align it with my long-term goal of building more equity in my business."

Having a properly-aligned balance sheet is essential for business survival. "If your balance sheet is unequal, and you have too much in that short-term bucket, it can hurt the business," Steadman says. "If you have short-term debt that should be in the long-term bucket, it can stunt your growth or your ability to extract profits from the business."

Restructuring is generally not a one-and-done deal. Customers with commercial real estate may look at restructuring their debt almost every five years, while businesses without real estate may consider restructuring annually. "It's amazing how often people are looking at it," Steadman says. "We're seeing people look at it more and more."

Common Reasons to Refinance

There are a wide variety of refinancing options available, depending on the needs of the borrower. The most common kinds of refinancing are...