139Navigating Corporate Debt: Strategies for Financial Resilience

Whether caused by shifting market conditions, natural disasters, unexpected competition or even poor management, business owners often find themselves struggling with unsupportable debt. Rather than seeking bankruptcy protection or selling assets, which can cost thousands of dollars for small companies and many times more for large corporations, the best strategy is to consider the options available for resolving the situation. These corporate debt solutions can help a company rework its financial obligations, restore profitability and ultimately make a successful exit for its owners.

Debt financing is a necessary part corporate debt solutions of capital formation for any business, and it is normal for most companies to be partially or completely financed by debt as well as equity. Debt-financed companies normally pay less tax than those that are entirely equity financed because the interest and related costs of debt financing are generally tax-deductible, while stock dividends are not. However, too much debt can be a problem for companies that are experiencing difficulties because it reduces their ability to function in a distressed environment and may lead them to take on more debt in an attempt to remain solvent.

To overcome problems with debt financing, treasury managers must carefully balance offsetting factors such as cash flow, risk, liquidity, and profitability. To accomplish this, a hybrid debt strategy is usually required. This involves a mix of both debt and equity financing, with the proportion of each that is deemed appropriate for the individual situation. This can help businesses avoid a collapse in the event of a crisis, or it can prevent an economic meltdown as a result of a severe decline in aggregate demand that triggers a global recession.

In the aftermath of a financial crisis, governments typically need to implement a broad policy response that includes a corporate debt solution. This must provide a mechanism to separate viable from non-viable companies and also address issues such as burden sharing among affected parties. There are three broad approaches to this issue, with one involving across-the-board, direct government involvement that determines the extent and method of burden sharing. Another involves the use of a formal insolvency system to bind in dissenting creditors, while the third option is a market-based, case-by-case approach that leaves decisions with private sector debtors and creditors.

A significant challenge of implementing corporate debt solutions is the need for rapid identification and assessment of corporate distress, which requires extensive data collection and a comprehensive system for monitoring credit-risk trends. Moreover, it is important for the government to have a rapid process for identifying and removing any impediments to debt restructuring.

In addition, the direct government approach usually involves some form of fiscal support, such as foreign exchange insurance schemes and subsidy programs, to facilitate debt restructuring. Alternatively, fiscal incentives could be provided to debtors and/or creditors by legislating that certain types of debt relief be granted on a prespecified basis. In either case, the government must provide sufficient resources to ensure that these measures can be implemented as quickly as possible.