I’m reading other definitions online and it says that it allows companies to restore liquidity & be more flexible. How? What do they mean by more flexible?
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Debts are restructured when the borrower does not have sufficient cash flow or is at very serious risk of default. Lack of cash flow can cripple an otherwise profitable company – salaries cannot be paid, suppliers stop delivery.
In some cases these cash flow shortages might be temporary (say a project delay) and the company has a good chance of a recovery. Lenders might decide that a restructuring of the debt – delaying payment, extending the term of the loans, reducing interest rates or even partial debt forgiveness is a better option than forcing a company to close down. A company that shuts down typically sells off their assets at very low prices and that may be insufficient to repay the debts.
By working together on a debt restructuring, the company avoids defaults and bankruptcy – freeing up funds that allow them to pull through their difficulties in the short term.
A company that has cash is more flexible – it can fix any product problems, negotiate better prices from suppliers, expand into new markets, complete projects, start new projects etc etc. Without cash or in severe cash shortage, companies cannot hire employees, may be forced to layoff, delay/cancel good projects, mark down and give big discounts just to get faster sales.
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