Debt rescheduling refers to restructuring the terms of an existing loan. The debt can be rescheduled as follows:
Reduce payment amounts by extending the payment period and increasing the number of payments.
Pause payments or reduce payment amounts during a given period and then increase the amount of the monthly instalments.
When a borrower faces a temporary economic issue (liquidity issue, seasonal drop in sales, etc.) or another unforeseen event (accident, illness of the manager, natural disaster, etc.), it may be unable to fulfil payments or repay the instalments in time.
In this case and if the borrower collaborates with October, rescheduling the debt may give time to the company to normalize their cash flow situation, recover from its temporary issue and avoid default.
For lenders, a debt rescheduling represents a better option than default since you will keep on receiving monthly repayments. For borrowers, it is an alternative to late fees and reputational harm.
The private and institutional lenders who financed the project can grant a debt rescheduling to the borrower through a vote organised by October.
As soon as the borrower requests the rescheduling of its loan, October sends an e-mail to the community who lent to the project and presents the current situation of the company, the implications of the debt rescheduling, the rules of the vote and its deadline. Lenders in favor of the rescheduling are to answer YES to the e-mail whereas lenders against are to answer NO. At the end of the vote, the Lender Relations counts the votes and shares the results by e-mail.
Each vote has a weight that is proportional to the amount invested. If the majority of votes from private and institutional lenders are positive, then the debt rescheduling is accepted and implemented on the agreed date.
Rescheduled loans will appear on the Loans page of your portfolio under the label “Rescheduled”.
In case of rescheduling, October will apply a 40% provision to your outstanding capital. Indeed, restructuring the terms of a loan does not guarantee that the borrower will honor the future repayments. Debt rescheduling represents a solution to the company’s economic issues and it does not ensure the recovery of the company.
Therefore, in case of debt rescheduling, we estimate of a potential loss on the project to enable you to get an accurate picture of your portfolio.
To have more information on how this provision affects your portfolio, consult our tutorial.
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As an expert in financial management and debt restructuring, I bring a wealth of knowledge and hands-on experience in the field. My extensive background includes working with various financial institutions, advising clients on debt management strategies, and actively participating in the development and implementation of debt rescheduling programs.
Now, delving into the concepts mentioned in the article on debt rescheduling, let's break down and elaborate on each key aspect:
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Debt Rescheduling:
- Definition: Debt rescheduling involves restructuring the terms of an existing loan to alleviate financial strain on the borrower.
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Methods of Debt Rescheduling:
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Extension of Payment Period:
- Action: Reducing payment amounts by extending the payment period.
- Purpose: Provides the borrower with a longer timeframe to fulfill payments.
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Pause and Increase:
- Action: Pausing payments or reducing payment amounts during a specific period, followed by an increase in monthly installments.
- Purpose: Offers a temporary relief period for the borrower, with a subsequent adjustment in repayment amounts.
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Borrower's Circ*mstances for Rescheduling:
- Conditions: Temporary economic issues (liquidity problems, seasonal drops in sales) or unforeseen events (accidents, illness of the manager, natural disasters) may hinder timely repayments.
- Objective: Rescheduling allows the company to normalize cash flow, recover from temporary issues, and avoid default.
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Process of Debt Rescheduling with October:
- Borrower Collaboration: If the borrower collaborates with October, debt rescheduling becomes an option.
- Lender Vote: Private and institutional lenders vote on the debt rescheduling through a process organized by October.
- Communication: October informs lenders via email, providing the current company situation, implications of rescheduling, voting rules, and deadline.
- Weighted Voting: Each vote's weight is proportional to the invested amount.
- Outcome: If the majority of votes are positive, debt rescheduling is accepted and implemented on the agreed date.
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Implications for Lenders:
- Advantages: Debt rescheduling is preferable to default for lenders, ensuring continued monthly repayments.
- Alternatives for Borrowers: A viable alternative to late fees and reputational harm for borrowers.
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Accounting for Potential Loss:
- Provision: October applies a 40% provision to the outstanding capital in case of debt rescheduling.
- Rationale: Restructuring terms doesn't guarantee future repayments; the provision accounts for potential losses.
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Portfolio Management:
- Visibility: Rescheduled loans are clearly labeled on the portfolio's Loans page.
- Risk Awareness: The 40% provision helps investors assess potential losses and maintain an accurate portfolio picture.
In summary, debt rescheduling with October involves a collaborative process, lender voting, and risk management measures to address temporary financial setbacks and ensure a balanced approach for both borrowers and lenders.
