What is a Troubled Debt Restructuring?

A troubled debt restructuring occurs when a creditor grants a concession to a debtor that it would not normally consider. A concession may involve restructuring the terms of a debt (such as a reduction in the interest rate or principal due, or an extension of the maturity date) or payment in some form other than cash, such as an equity interest in the debtor. A restructuring is done for economic or legal reasons related to the debtor's financial difficulties. A debtor is experiencing financial difficulties when one of the following conditions is present:

It is in default on any of its debt;
It is in bankruptcy;
It has securities that have been delisted;
It cannot obtain funds from other sources;
It projects that it cannot service its debt; or
There is significant doubt about whether it can continue to be a going concern.

A bank may allow a restructuring when the alternative is for it to take a complete loss on the debt when the borrower enters bankruptcy proceedings.

A debtor that can obtain funds from sources other than the lender at market interest rates is generally not involved in a troubled debt restructuring.