Adani Group that is battling with Hindenburg crisis would announce its debt refinancing plans for Adani Transmission in a few weeks, executives said in an investor call recently.
Those who are not aware would wonder what exactly is debt refinancing, and if this were a cakewalk then why does not every debt-laden individual and organisation resort to this? Let us explore more on this here.
What is debt refinancing?
Debt refinancing refers to procuring a new loan with favourable terms to pay off a previous loan.
Not only corporates, even individuals can also opt for what is also known as reorganisation of loan. When an individual realises that s/he can get a loan at a lower rate of interest, s/he can choose this option.
It refers to applying for a new loan with relatively better clauses than the previous loan.
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For example, when someone has an existing loan for which one pays 11 percent interest per annum. And the individual happens to get a new loan with an interest of 10 percent, the proceeds of which will be used to pay off the previous loan — the process is referred to as debt refinancing or reorganisation of loan.
Reasons for refinancing
In case you are wondering what are the reasons for refinancing, and if this were this easy, then why can’t everyone do this? It’s certainly true that refinancing is feasible only when the borrower's credit score is high, enabling them to procure a fresh loan at a lower rate of interest.
The other reason could be that the interest rates, in the market, have been on a downward slope.
Still, borrowers need to keep in mind the expenses and/or penalties arising out of prepayment. There could also be some processing charges on account of new loan. So, the borrower must ensure that the process of refinancing or restructuring leads to some monetary savings even after incorporating additional expenses and charges.
Debt refinancing is slightly different from debt restructuring, which is another form of debt reorganisation.
In both the situations, a company or an individual makes an effort to strengthen its financial position. Debt restructuring refers to making changes in the existing contract to suit its financial situation.