- The process through which a company reorganizes its debt obligations by replacing or restructuring existing debts. Refinancing may also involve issuing equity to pay off a percentage of debt.
Debt is replaced or refunded by a company with money that is raised by issuing or creating other borrowing. In restructuring, a company works with its creditor to change the terms of a loan; these terms can include the reduction of interest rates, the improvement of covenants or the extension of the loan's terms.
Corporate refinancing will often come about if a company is unable to meet its current obligations and needs to restructure the terms of its existing debt arrangement. This usually involves lowering the interest rate and extending the time to maturity. This happens most often when a company is near bankruptcy or is in Chapter 11 bankruptcy.
Refinancing will also occur when interest rates have fallen in the market, as the lower current market rates allows a company to cut down on the overall costs of debt a company faces. One way a company can achieve this is by calling its redeemable or callable bonds, then reissuing them at a lower rate of interest.
Investment dictionary. Academic. 2012.
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