Rescheduling
When rescheduling , one or more existing loans are redeemed and replaced by a new one with different rates, deadlines or interest. The debtor can benefit from a possibly lower general interest rate level, but may have to accept early repayment penalties . Debt rescheduling is often carried out in the event of a corporate crisis , critical national debt or highly indebted private individuals . The goals are then to relieve the debtor's debt situation and bring about debt sustainability .
The transfer of a loan to a new lender is also known colloquially as loan redemption .
General
In the case of a debt rescheduling, existing debt relationships must be changed without the need to reduce the amount of debt involved. The change can consist in reducing the existing interest and / or repayment burdens in order to free the debtor from excessive expenses (interest burden) and / or liquidity burden (repayment burden), which can lead to insolvency or overindebtedness . Debt rescheduling thus serves to reduce the repayment burdens in order to improve the entrepreneurial or state room for maneuver or to prevent private overindebtedness. In order to achieve this, however, it is not infrequently necessary to increase the amount of the debt as part of a new debt relationship in order to proportionally reduce the term of the debt and the repayment burden. Debt rescheduling measures represent part of the external restructuring because outside creditors have to be involved and undesirable developments that have occurred are to be eliminated.
Up until now, debt rescheduling has primarily been an issue for companies and private individuals , but since Mexico's payment moratorium in August 1982 at the latest, debt rescheduling in highly indebted countries has come to the fore.
Legal issues
From a legal point of view, the rescheduling has to be viewed differently. If the credit agreement on which an already existing contractual obligation is based is only changed by "additions to the contract" or a "supplement", there is a change in debt in the legal sense under German law, whereby the previous contract is continued. However, if there is no reference to the previous debt relationship, but a new loan agreement replaces the previous one, then, according to the rebuttable presumption, there is a novation , with the result that the old debt relationship expires according to § 241 BGB . Technically, this new borrowing is used to repay existing debts.
The BGH also sees the conversion of a current account credit into a loan at the same credit institution ("internal bank rescheduling"), in case of doubt, merely as a change in the contract with the consequence that a guarantee entered into to secure the repayment claim from the current account remains in place. If the repayment loan is used as agreed to repay the current account claim, and the new - lower interest - liability is not higher than the old one, the mere fact that the borrower has to repay the new loan in monthly installments leaves the rescheduling for the Surety does not appear disadvantageous. According to the BGH, a monthly repayment obligation would burden the debtor less than the obligation to repay the loan in full. If the borrower is only interested in a cheap rescheduling when the interest rate level has fallen , this interest does not justify the right to early redemption of the old loan.
Debt rescheduling options
Interest relief can be brought about by switching from fixed interest to variable interest or vice versa, or through a new refinancing base for the creditor (with the effect of lower interest rates). Interest and repayment burdens can be reduced by extending the previous interest and repayment periods, by repayment-free periods or by switching to debtor-favoring repayment types (repayment at the end of the term; so-called bullet payment ).
Demarcation
Other restructuring measures are often referred to as debt rescheduling, but have nothing to do with them in terms of content. The consolidation as converting short-term into long-term debt rescheduling can be used and will be construed as a novation in most cases. This is the case when an existing short-term loan agreement is replaced by a long-term one and the disbursement from the long-term loan agreement is used solely to repay the liabilities from the short-term loan agreement.
Debt relief , on the other hand, is not rescheduling , as this leads to a reduction in debt that is not due to repayment. The deferral is also not a rescheduling, because it does not change the existing obligations, but merely postpones interest and / or repayment payments due. However, if the term is extended due to a deferral, the deferral is also to be classified as a debt rescheduling measure.
Reasons for debt restructuring
In the case of companies and states, debt rescheduling is the result of previous excessive borrowing, which coincides with an economic weak phase of the debtor. As long as there is a favorable economic environment, the debt burden is not noticed or played down because it is believed that the favorable economic circumstances would contribute to a substantial improvement in the debt situation. Reasons for excessive borrowing for companies can be major bad investments (in fixed assets or participations ), insufficient equity or high losses from the operational or non-operational area. In the case of states, it is often high armament expenditure , the seepage of state revenue through corruption or investments in economically nonsensical prestige projects.
Debt rescheduling in the private sector
The aim of rescheduling at the private sector level is usually to benefit from the more favorable interest and repayment rates on a new loan. In this way, among other things, the creditworthiness of the borrower can be restored. Another aim of rescheduling can be to combine payment obligations from various loans and financial purchases into one total debt. From an economic point of view, however, this goal does not offer any advantages, since additional costs in the form of early repayment penalties and processing fees may arise in the event of a debt rescheduling.
By taking out a new loan at lower interest rates or longer terms and thus lower rates, the individual payment obligations are replaced. The savings come about in two ways: On the one hand, loans are taken out on more favorable terms, so interest and installments do not burden the debtor to the same extent as the old payment obligations; on the other hand, several outstanding payments can be combined into a single loan by rescheduling. In this way, there are only one monthly installment and a uniform interest rate, and the debtor gains an overview.
For a successful rescheduling, borrowers need to consider the notice periods on their loans. Variable rate loans can be canceled within three months; Fixed-rate loans can be canceled six months before the end of the fixed interest rate period, which is usually reached after ten years. If an existing loan agreement is terminated before the end of the fixed interest period, a prepayment penalty (VFE) is due. In some cases, rescheduling to a cheaper loan before the end of the fixed interest rate may still be worthwhile, namely if the expected interest savings are higher than the sum of the early repayment penalty. For this, the sums of interest that are saved are offset against the costs that arise in the event of early loan repayment. For example, the interest on an installment loan is 3 to 4 percent today, a few years ago it was 8 percent. If home savings loans are repaid early, no VFE is due.
Corporate debt rescheduling
In order to be able to measure a critical level of debt in a company, it is necessary to use business indicators . For companies the sum of all liabilities and the interest and principal service (be debt service ) each in relation to the cash flow set to determine debt sustainability. The debt situation for companies is critical - depending on the sector - when the liabilities consistently exceed 400% of the (operating) cash flow or the debt service exceeds 50% of the cash flow. The last-mentioned debt service coverage ratio (so-called Debt Cover Ratio , DCR) can be used to check whether the resulting debt service can be covered by the cash flow generated or whether the loan servicing is at risk. If these limits are exceeded not only temporarily, a company is in crisis. Then it has to be examined which group of creditors ( credit institutions , suppliers , tax authorities or shareholders ) has the highest debt share. It usually only makes sense that the most important group of creditors agrees to reschedule. This can either choose to change the previous loan agreements or to novation.
Rescheduling of sovereign debt
If states get caught in a state crisis caused by excessive indebtedness, rescheduling of a state's foreign debt can also be considered. Sometimes the term restructuring is also used for this. There are indicators for this that indicate a national crisis. The debt sustainability of a state is jeopardized when foreign debts account for more than 150% of annual export earnings or more than 250% of government revenue. The metrics known as the EU convergence criteria are also used as a yardstick . According to this, the national debt may not amount to more than 60% and the net new debt not more than 3% of the gross domestic product ( Art. 126 TFEU ). The situation is also critical when the interest and repayment service exceeds 20% to 25% of the permanently achievable export revenues. The debt / export ratio relates to debt in the numerator and export income in the denominator. If export revenues show no great growth dynamic or even fall and the debt level remains the same, debt sustainability decreases. The economic growth of some heavily indebted countries, especially their export revenues, will not be enough to generate enough foreign currency to maintain debt servicing (interest on loans and repayments). Central bank balances , tax revenues or current export revenues are available for servicing a state's debt . If these sources are no longer sufficient, it can lead to insolvency.
Debt rescheduling at the state level is usually coordinated and accompanied by international organizations and institutions such as the International Monetary Fund , the World Bank or the Paris Club . These organizations and the creditor states issue conditions and requirements that are attached to the debt rescheduling measures in order to ensure an economic recovery process for the debtor states. If private companies and credit institutions are the creditors of government debt, debt rescheduling negotiations take place in the London Club .
Effects
Whether a debt rescheduling - like other restructuring measures - can contribute to the permanent recovery of the debtor is highly controversial. In any case, the rescheduling measures in favor of companies or states do not change the structural weaknesses that triggered these rescheduling measures. If structural deficiencies are therefore not eliminated or only insignificantly eliminated, a new debt rescheduling campaign will soon be necessary. Against this background, the ECB is very skeptical of Greece's debt restructuring. “A heavily indebted country must generate a primary surplus. Debt rescheduling will not change that. The second point is the need to strengthen the growth forces. Debt rescheduling does not help either. ”With these words, the Finnish ECB Council member Erkki Liikanen summed up this problem to the FAZ. The cause of Greece's low debt sustainability is therefore its barely competitive economic and export structure, which would not change through debt rescheduling or debt relief.
Before rescheduling, it must always be remembered that the debtor with the creditor, especially with banks, may intervene in existing credit agreements that are linked to fixed interest and repayment structures. The early, rescheduling-related loan termination can trigger a prepayment penalty, which contributes to an increase in the loan costs. The amount of the early repayment penalty to be paid therefore has a direct effect on the profitability of a debt rescheduling.
In the case of companies or states as debtors, a debt rescheduling measure can be the subject of the Collective Action Clause . The prerequisite is that these debts are securitized in bonds that contain this clause or that fall under a law that provides for the application of the clause for these bonds. Then the majority decision of the bondholders also binds the negative minority.
Effects on late payment
Debt restructuring (also a simple consolidation of short-term into long-term debt) may already be a credit event ( English "credit event" ) representing if a corresponding agreement in the loan agreements contained or bond terms. This is all the more true for debt relief because the associated "haircut" (percentage waiver of claims by the creditors) violates the agreed credit terms . In international, but also loan terms or loan agreements under German law, further clauses protecting creditors may be included. This applies to both companies and states. These include the default clause with its sub-form, the cross-default clause , the pari passu clause or the significant deterioration in financial circumstances ( English "material adverse change clause "). They may contain regulations through which the creditor is granted the right to be able to call the loan or loan amount due immediately in the event of debt rescheduling measures. If such rescheduling measures are specifically mentioned in a clause, this automatically triggers a default ( English "default" ) with the result that the debts concerned are due for immediate repayment. This also applies to credit default swaps that were concluded by third parties to hedge certain corporate or government bonds, for example. In the case of planned rescheduling measures, these “triggers” that trigger termination should be considered because they could trigger a wave of termination that would jeopardize the goal of the planned rescheduling measures.
See also
Individual evidence
- ↑ BGH, judgment of September 30, 1999 , Az. IX 287/98, full text = WM 1999, 2251 f.
- ^ BGH, judgment of May 6, 2003 , Az.XI ZR 226/02, full text.
- ↑ Integration of the risk factor in a cash flow-based project finance , 2007, p. 11.
- ↑ Andriy Hvozdetskyy, Development of a Method for Cash Flow Analysis , 2011, p. 25 ff.
- ↑ Urs Egger, Agricultural Strategies in Various Economic Systems , 1989, p. 124.
- ↑ Greece is preparing to reschedule , Welt Online from April 18, 2011.
- ↑ Debt rescheduling negotiations with over-indebted states take place on two levels: If the creditors are state institutions, debt rescheduling is negotiated in the Paris Club in cooperation with the International Monetary Fund (IMF). Private creditors, primarily banks, work together in the London Club , but also form special consortia Gabler Wirtschaftslexikon
- ↑ Does Greece benefit from debt rescheduling? , FAZ from November 1, 2011.