The nature of loan workouts
Loan workouts are voluntary agreements to restructure a company’s finances. The principal aim of such transactions is to improve a company’s ability to service its debt.
At its core, this requires one or more of the following:
- A reduction in the nominal or present value of the company’s debts.
- An extension of the period over which its debts are serviced.
- The provision of new finance.
- The appropriate restructuring of the business of the enterprise.
A loan workout may be formally defined as: An out-of-court agreement between the stakeholders of a company on a mutually acceptable course of action, with the aim of rescuing an enterprise with a commercially viable future. Loan workouts are entered into voluntarily by all the participants affected by their terms, without being compelled to do so by a court. There is also a distinction between the company (or the legal entity) and its business undertakings. The focus of a loan workout is on the latter. In certain circumstances, a business may be viable, whereas the company which owns it, may not be. In such circumstances, a loan workout may focus on the commercially viable parts of an enterprise (provided they are a relatively significant element of the group), whereas other parts may be subject to statutory insolvency procedures.
A typical loan workout involves three stages:
- The calling of a moratorium to achieve stability.
- A restructuring of the company’s business and finances.
- A refinancing once the business has been turned around, or the implementation of other exit strategies by the company’s lenders.